Barbara Kathleen Higgs, 43, a manager of the Bulan Baru (New Moon) resort on the Indonesian island of Lombok has been charged with possession of cannabis and could face a maximum 10 years in prison if convicted.
Indonesian police allege that they found 50 grams of cannabis and two bags of cannabis seeds at Higgs' house in Senggigi, where she has lived for five years with her husband.
Under Indonesian law there is no provision for bail. Ms Higgs will remain in custody until her trial is complete.
According to Police Brigadier Kadek Sudeartana, Ms Higgs has been the "target of operations for one month". Sudeartana also said that Ms Higgs was suspected of being in possession of drugs after tip-offs from a number of members in the community.
The husband of Ms Higgs, who refused to give his name claims the arrest is a misunderstanding. "It's been a mistake", he said. "You'll find that by tomorrow all the charges have been dropped". 
Australian consular officials from Bali have visited Ms Higgs and offered their assistance.
Ms Higgs is the most recent Australian to be caught up in drug offences in Indonesia, with the Bali Nine, Schapelle Corby, Michelle Leslie and Graham Payne facing the Indonesian legal system in recent times.
Australian Prime Minister John Howard and Minister for Foreign Affairs Alexander Downer have once again warned Australians to avoid drugs when travelling overseas.
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Australian resort manager faces possible 10-year prison sentence in Indonesia