I refuse to  post anything worth more than $50 without registered post.  Don't know if its still the case, but you used to be able to claim up to $50 for a missing or damaged item through Auspost and I have done it succesfully a few times. The process is you ask for a complaint form and fill that out. It asks details about exactly when & where posted & description and value of the item. You take that to the PO & they send it off for investigation. The investigation takes up to 14 days. You might receive a phone call from the investigation department. You eventually after 2 to 3 weeks get a letter back from Auspost saying they couldnt find it, then you call the number listed and tell them you want to file a claim for the value of the item. I received a refund at least twice, but not sure if I was always succesful.

In your situation, assuming the value was less than $50 I would refund, cancel the transaction and put a claim in through Auspost. I would also try to get  agreement from the buyer that they will agree to cancel the transcation before doing the refund.That way you get your ebay fees back & it also protects you from a vindictice buyer leaving Neutral or Neg  even after you have refunded. I've seen it happen. And if the buyer paid with Paypal they can make a claim for item not received & unless you have proof of sending  (& no Paypal wont accept receipt from PO as proof) Paypal always favours the buyer & will refund them. So if via Paypal, you might as well get in first & refund.