Deposit Vs Prepayment: Can You Keep The Money?

Say you run a cafe in Brisbane and a customer orders a custom birthday cake for Saturday. You take $150 upfront, buy special ingredients and block out kitchen time. On Friday afternoon, the customer cancels and asks for the money back.

Can you keep it? The answer depends on what you called the payment, what your terms said before the customer paid, and whether your policy lines up with the Australian Consumer Law.

This can feel frustrating because a cancellation often means real lost time, lost stock and lost bookings for your business. The good news is that your customer contracts and payment terms can do a lot of the heavy lifting if they're clear, fair and given to the customer at the right time.

What Is The Difference Between A Deposit And A Prepayment?

A deposit is usually money paid to secure a booking, order or commitment, while a prepayment is usually money paid in advance for goods or services you'll supply later.

The label matters, but it isn't everything. If there's a dispute, a regulator or court will look at the substance of the arrangement, not just the word you used on the invoice.

In practice, these are the common labels you might see:

• Deposit: An upfront amount to confirm the customer's order or booking. It may be credited towards the final price.
• Security deposit: An amount held to cover potential loss or damage, often refundable if there are no issues.
• Holding deposit: An amount paid to hold a spot, item or appointment for a set time.
• Prepayment: Payment for some or all of the goods or services before you supply them.
• Instalment: A scheduled payment towards the total price, often linked to milestones or dates.
• Cancellation fee: A fee charged if the customer cancels after a particular point.

For example, if a customer pays 50% upfront for a website build and you haven't started work yet, calling it a deposit won't automatically let you keep all of it. On the other hand, if you clearly told the customer that a reasonable $200 deposit secures a limited appointment and becomes non-refundable after 48 hours because you can't easily fill the slot, that may be much easier to justify.

Are Deposits Refundable In Australia?

Deposits can be refundable or non-refundable in Australia, depending on your contract terms, the reason for cancellation and whether the amount is fair in the circumstances.

There's no single rule that every deposit must be refunded or that every deposit can be kept. For your business, the safest approach is to spell out exactly what happens before the customer pays.

A deposit is more likely to be treated as non-refundable if:

• your terms clearly say it's non-refundable
• the customer saw or accepted those terms before paying
• the amount is reasonable compared to your likely loss
• you have already incurred costs or turned away other work
• the customer cancels for a reason that isn't your fault

A deposit is more likely to need to be refunded, at least partly, if:

• your terms didn't explain that it was non-refundable
• the amount is much higher than your actual loss
• you cancelled or couldn't supply what was promised
• the customer is entitled to a remedy under the Australian Consumer Law
• your term could be considered unfair, misleading or a penalty

Be careful with blanket phrases like all deposits are non-refundable in all circumstances. That might look simple, but it can create Australian Consumer Law risk if it suggests customers have no rights even when your business fails to deliver, supplies services without due care and skill, or provides goods that don't meet consumer guarantees.

Can You Keep A Customer's Money If They Cancel?

You can usually keep an amount that fairly reflects your genuine costs or loss, but keeping more than that can be risky if your terms are unclear or the amount is out of proportion.

Think of it this way: your cancellation policy should protect your business from real loss, not punish the customer. If a fee is so high that it looks like a penalty, it may be harder to enforce.

Example: A Custom Cake Order

Let's go back to the Brisbane cafe. Leah runs the cafe and takes a $150 upfront payment for a custom cake priced at $300. Her terms say:

• the $150 deposit secures the order
• the deposit is refundable if the customer cancels more than 7 days before pickup
• 50% of the deposit is refundable if the customer cancels 3 to 7 days before pickup
• the deposit is non-refundable if the customer cancels less than 72 hours before pickup, because ingredients and staff time are already committed

If the customer cancels the day before, Leah has a much stronger position to keep the deposit. Her policy is clear, it was accepted before payment, and the amount connects to her likely loss.

Now compare that to a $1,500 non-refundable deposit for the same $300 cake. Even if the invoice used the word deposit, that would be very difficult to justify.

What If You Can Rebook Or Resell?

If you can fill the appointment, resell the product or avoid most of your costs, that can affect what is fair to keep. Your contract can still include an administration fee or cancellation fee, but the amount should be sensible.

For service businesses, you might structure your policy around notice periods, for example:

• full refund if cancellation is more than 7 days before the booking
• 50% refund if cancellation is 2 to 7 days before the booking
• no refund for no-shows or cancellations within 24 hours

Those timeframes won't suit every business. A wedding supplier, builder, consultant or event venue may need longer cancellation windows because the losses are different. The point is to choose rules that match how your business actually operates.

What Does The Australian Consumer Law Say About Deposits And Refunds?

The Australian Consumer Law doesn't ban deposits or cancellation fees, but it does stop you from using unfair, misleading or overly broad refund terms.

The Australian Consumer Law is in Schedule 2 of the Competition and Consumer Act 2010. It applies to many dealings with customers, including consumers and, in some cases, small businesses. For upfront payments, the main issues are usually consumer guarantees, misleading conduct and unfair contract terms.

Consumer Guarantees Still Apply

If you sell goods or services to customers, the consumer guarantees may require you to provide a repair, replacement, refund or other remedy if something goes wrong.

For example, you generally can't refuse a refund by pointing to a non-refundable deposit term if:

• you don't supply the service with due care and skill
• the product isn't of acceptable quality
• the product doesn't match the description or sample
• you can't supply within the agreed timeframe, or within a reasonable time if no date was agreed
• the goods or services aren't fit for a purpose the customer made known to you

This is why no refunds signs and blanket refund exclusions can be a problem. You can have a strict cancellation policy, but it can't take away rights the customer has under the Australian Consumer Law.

Unfair Contract Terms Can Be A Serious Issue

Unfair contract terms are also relevant, especially if you use standard business terms and conditions that customers don't really negotiate.

Since 9 November 2023, unfair contract terms can attract penalties under the Australian Consumer Law and the ASIC Act for consumer and small business standard form contracts. For conduct on or after 28 March 2026, the maximum penalty for corporations under the Australian Consumer Law can be the greater of $100 million, three times the benefit obtained, or 30% of adjusted turnover during the breach turnover period. For individuals, the maximum penalty can be $2.5 million.

You don't need to be a large company for these rules to matter. If your terms are standard form and they create a big imbalance, aren't reasonably necessary to protect your legitimate interests, and would cause detriment if relied on, they may be unfair.

A deposit or prepayment term is more likely to raise concerns if it lets you keep all upfront money no matter what happens, even where you haven't incurred costs or you're the one who cancels.

How Should You Draft Customer Deposit Terms?

Your deposit terms should clearly say what the payment is for, when it becomes non-refundable and what happens if either side cancels.

Good drafting doesn't have to be complicated. It should answer the questions a customer would naturally ask before paying.

Your terms should cover:

• Amount: The deposit amount, percentage or minimum fee.
• Purpose: Whether it secures a booking, covers initial work, covers materials or forms part of the total price.
• Due date: When the customer must pay, and whether the booking is confirmed only after payment clears.
• Refund rules: When the deposit is refundable, partly refundable or non-refundable.
• Notice periods: How much notice the customer must give to cancel or reschedule.
• Your cancellation rights: What happens if you need to cancel, postpone or stop supplying.
• Customer changes: Whether changes to dates, quantities, scope or designs affect the payment.
• GST: Whether amounts are GST-inclusive or GST-exclusive.
• Payment fees: Any card surcharges or payment processing fees, if you charge them.
• Balance payment: When the remaining amount is due and what happens if it isn't paid.

If you want a payment to be non-refundable, don't hide that in small print after the customer has already paid. Put it near the payment button, booking form, invoice acceptance wording or signed contract.

For higher value transactions, it's worth using a tailored customer contract or terms of sale rather than a generic template. Templates often miss the practical details that make your policy fair for your business model.

What Should A Prepayment Clause Include?

A prepayment clause should explain when the customer pays in advance, what the prepayment covers and how refunds are calculated if the contract ends early.

Prepayments are common for subscriptions, packages, retainers, courses, events, manufacturing orders, consulting projects and online goods and services. They can be helpful for cash flow, but they need careful wording.

A clear prepayment clause might deal with:

• whether the prepayment is for a fixed period, project stage, minimum term or credit balance
• whether unused amounts roll over, expire or are refunded
• whether any setup fees, onboarding fees or administration fees are separate from the prepayment
• what happens if the customer cancels before you start work
• what happens if the customer cancels after work has started
• what happens if you terminate because the customer has breached the contract
• what happens if you can't supply the goods or services

For example, if you run a marketing agency and a client prepays $3,000 for a monthly package, your clause might say the amount is applied to that month's services, unused hours don't roll over unless agreed in writing, and cancellation requires 14 days' notice before the next billing date.

If you charge for work performed before cancellation, keep records. Timesheets, project notes, purchase receipts, design files, email approvals and supplier invoices can all help show why the amount you kept was reasonable.

How Do You Create A Fair Business Cancellation Policy?

A fair cancellation policy should be clear before the customer buys, proportionate to your likely loss and consistent with the Australian Consumer Law.

Your policy can be firm. It doesn't need to give customers unlimited flexibility at your expense. But it should feel commercially reasonable if someone outside the business reads it later.

A practical way to build your policy is to work through these steps:

1. Map your real losses. List the costs you incur when a booking or order is cancelled, such as stock, labour, supplier deposits, venue hire, design time or lost capacity.
2. Set notice periods that match your operations. A hair salon may use 24 or 48 hours. A wedding florist may need several weeks. A manufacturer may need milestone-based rules.
3. Use partial refunds where they make sense. A sliding scale can be easier to justify than an all-or-nothing approach.
4. Separate change fees from cancellation fees. Rescheduling may cause less loss than full cancellation, so your terms can treat them differently.
5. Explain what happens if you cancel. If your business can't supply, the customer will usually expect a refund or a suitable alternative.
6. Make the policy visible. Put it in your customer terms, terms of trade, quote, booking page, checkout flow or signed agreement before payment.

Also think about how your team explains the policy. If a customer is told verbally that they can cancel anytime, but your written terms say the opposite, you'll have a harder time relying on the written policy.

For online businesses, make sure the customer actively accepts your terms before paying. A checkbox or clear checkout wording is usually stronger than a hidden footer link that no one sees.

Common Mistakes To Avoid

The biggest mistake is assuming that calling something a deposit automatically lets you keep it.

Other common traps include:

• Using vague wording. Phrases like deposit required don't explain whether it's refundable.
• Giving the terms too late. A refund rule shown after payment may not form part of the contract.
• Making every amount non-refundable. This can create unfair contract term and Australian Consumer Law issues.
• Forgetting your own cancellation rights. Your terms should say what happens if illness, supply issues or staffing problems mean you can't perform.
• Copying another business's policy. Their costs, notice periods and customer risks may be completely different from yours.
• Ignoring chargebacks. If customers pay by card, unclear terms can make disputes harder to defend.
• Not training staff. Your front desk, sales team or account managers need to describe the policy consistently.

Clean payment terms can also protect your customer relationships. When people know what they're agreeing to upfront, cancellations are less likely to turn into emotional disputes.

Key Takeaways

• A deposit usually secures a booking or commitment, while a prepayment is payment in advance for goods or services.
• You can often keep a reasonable amount after cancellation if your terms were clear and the amount reflects your likely loss.
• The Australian Consumer Law still applies, so your refund policy can't remove consumer guarantees or mislead customers.
• Since 9 November 2023, unfair contract terms can lead to penalties, so standard cancellation and non-refundable payment clauses need extra care.
• Your customer terms should explain the amount, purpose, refund rules, notice periods and what happens if either side cancels.
• A tailored cancellation policy is usually stronger than a generic template because it matches your real costs and business model.

If you'd like help with your customer terms, deposit and prepayment clauses, cancellation policy or refund processes, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.