Mate in Sydney holding large hammer (7)
I believe the answer is:
clobber
'hammer' is the definition.
'mate in sydney holding large' is the wordplay.
'mate in sydney' becomes 'cobber' (AUS slang for a friend).
'holding' means one lot of letters goes inside another.
'large' becomes 'L' (eg in clothes sizes).
'cobber' enclosing 'l' is 'CLOBBER'.
(Other definitions for clobber that I've seen before include "Hit hard; clothing" , "Tackle" , "belt or > sock" , "Clothes; to beat, criticise (slang)" , "Kit" .)