The government will scrap the 10% goods and services tax (GST) on sanitary products after states and territories agreed to the reform at a meeting on Wednesday morning.
Tampons and other sanitary products will move into the GST-free essential health items category where condoms and lubricant have been sitting since the tax was introduced 2000.
Treasurer Josh Frydenberg proposed the federal reform, to come into effect January 1, at a meeting with state and territory treasurers in Melbourne on Wednesday morning.
The move will cost the states $30 million a year, but the Coalition argues the shortfall will be easily covered because they are already receiving more GST revenue than forecast.
NSW treasurer Dominic Perrottet told Sky News it would end up costing his state around $10 million, which it would absorb for a "good cause".
Are the people who think pads and tampons are a luxury item cool with people just bleeding everywhere?
In early August, when he was treasurer, prime minister Scott Morrison admitted the tax should never have been applied to sanitary items and promised to "remediate" the situation.
"I think it's an anomaly that has been built into the system for a long time and the states have decided to hold onto the money instead of getting rid of it," he said.
Labor proposed a plan in April to scrap the tax and offset any losses in revenue by applying the tax to 12 natural remedies currently exempt from the GST.
In 2015 then treasurer Joe Hockey vowed to end the tax on tampons but was overruled by the PM at the time Tony Abbott.