Australia's competition regulator has lashed out at supermarket giant Coles, which is set to pay farmers $5.25 million after allegedly failing to pass on a drought levy it raised on fresh milk.

Australian Competition and Consumer Commission chair Rod Sims said on Thursday Coles had failed to "pass the pub test" after telling customers it would hike the price of its own-brand milk by 10¢ a litre to help drought-stricken farmers and then not passing on all the money raised.

In March, Coles said it would support the supplier of its own-brand milk, dairy co-operative Norco, by increasing milk prices and passing the extra money straight on to dairy farmers and milk processors.

Yet the ACCC claims the supermarket chain wasn't paying Norco the amount it said it would in its marketing materials, which Mr Sims labelled an "egregious breach" of consumer law.