Prime Minister Anthony Albanese announced the significant policy shift for Kiwis living in Australia ahead of his meeting with NZ Prime Minister Chris Hipkins in Brisbane on Saturday, offering them a direct pathway to citizenship.
From July, previous hurdles to citizenship including income and health tests will be removed, allowing New Zealanders to become citizens after four years of living in Australia.
Mr Albanese said the changes were "consistent with our ambition to build a fairer, better managed and more inclusive migration system".
"Australia and New Zealand have a deep friendship, which has been forged through our history, shared values and common outlook," he said.
"I am proud to offer the benefits that citizenship provides."
The Australian government believes the changes could see roughly 400,000 Kiwis, of the estimated 700,000 living in Australia, eligible for citizenship.
That will bring a huge array of rights that many New Zealanders in Australia do not currently enjoy.
These include access to key welfare benefits, student loans, disability support and public housing, being able to work for the public service or in the armed forces and voting.
Australians living in New Zealand already enjoy all of those benefits.
The Labor government's momentous shift has delighted advocates, including Joanne Cox, the chairwoman of Oz Kiwi, the peak body for New Zealanders in Australia.
"It's like Christmas," she told AAP, as she broke down crying when she learned the news.
Ms Cox has led the group for a decade as a volunteer, railing against "discriminatory" hurdles to access.
"It's very emotional. It's been a slog," she said.
"It's been demoralising. It's been frustrating. There have been tears and anger over the years and some absolute horror stories along the way.
"But this, it's like a fairy tale. The changes they are bringing in are enormous and the impact they will have on so many people is enormous."
The changes overturn a 2001 decision by John Howard's coalition government to strip Kiwis of citizenship access, forcing them onto special category or temporary residency visas.
In 2016, Malcolm Turnbull's coalition government opened a pathway to citizenship for those earning over $53,900 for five consecutive years, but the new change essentially opens the door to all Kiwis.
Standard assessments such as character checks and English competency tests will still apply, as they do for all would-be citizens.
Mr Hipkins said the announcement "brings our nations closer together".
"This is the biggest improvement in the rights of New Zealanders living in Australia in a generation and restores most of the rights Kiwis had in Australia before they were revoked in 2001," he said.
"Most of us know someone who's moved across the Tasman. They work hard, pay taxes and deserve a fair go."
Successive NZ governments have lobbied their Australian counterparts since 2001 for the changes without success.
Then, in June last year, Jacinda Ardern seized on the opportunity presented by a new Australian government, becoming the first world leader to visit Mr Albanese after his election in May.
She found willing ears.
While Labor was in opposition a band of MPs including the now-treasurer Jim Chalmers - dubbed by Oz Kiwi as the "Member for New Zealanders" - championed their cause.
There were concerns in NZ the changes could lead to increased emigration but Ms Ardern told AAP in December she considered it a duty to care for New Zealanders based overseas.
"It's about maintaining the reciprocal relationships that we have," she said.
"In the same way that we've advocated for them to have rights in Australia because we give rights to Australians, we advocate for New Zealanders to maintain the rights they have in the UK.
"We look after our people no matter where they are contributing in the world."
It is not yet clear whether the Peter Dutton-led Australian opposition will support Labor's changes.
