The last two hold-out states, NSW and Queensland, have agreed to implement the Murray-Darling Basin Plan more than a year after the federal government signed it into law.
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The agreement marks the culmination of more than six years of at times fractious debate since the Howard government first proposed a national water plan.
A commitment by the federal government to cap water buy-backs at 1500 gigalitres and increase funding for water infrastructure programs was crucial in getting NSW and Queensland to agree to implement the $13 billion plan.
Victoria, South Australia and the Australian Capital Territory have also signed an amended National Partnership Agreement – bringing all the states on board for the first time.
Queensland signed the agreement on Wednesday night while NSW Premier Barry O'Farrell flew to Canberra on Thursday to formally sign a deal with Prime Minister Tony Abbott.
“This is a historic reform that delivers a positive outcome for NSW, as well as the broader national interest,” Mr O'Farrell said after meeting Mr Abbott.
In signing the agreement, the NSW government relented on a previous demand that the Commonwealth agree to a 3 per cent cap on irrigation entitlements buybacks
Under the deal, NSW will receive $32.5 million, Victoria $25 million, South Australia $15 million and Queensland $15 million from the Regional Economic Diversification Program.
In 2010, angry farmers in Griffith burned copies of the Murray-Darling Basin draft plan, claiming it would destroy local communities.
