Australia may live to regret captain Tim Paine's decision not to enforce the follow-on against New Zealand as his batsmen succumbed to a shock collapse late on day three of the Boxing Day Test in Melbourne.

After starting the day 44 for two, the Kiwis struggled to make any sort of impact with the bat as Australian quick Pat Cummins (5-28) tore through the New Zealand line-up to skittle the visitors for just 148.

However, despite Australia's 319-run lead, Paine decided not to make New Zealand bat again and instead opted to return to the crease in an effort to give his men as much breathing room as possible.

Following a fast start from Australia's openers, New Zealand finally started to show some venom in attack, dismissing Joe Burns for 35 and Steve Smith (seven) five balls later to have the Aussies reeling at 110 for four in the dying stages of the day's play.

Travis Head (12) and Matthew Wade (15) steered Australia to 137 for four by stumps and will return to the crease on Sunday, with the home side leading by 456 runs.