Foreign Affairs Minister Alexander Downer asked Indonesia officials to accelerate talks on the agreement earlier this year after negotiations on a similar deal between Indonesia and France bogged down.
As well as transferring Australian prisoners from Indonesia, the agreement would pave the way for the transfer of Indonesian prisoners being held in Australia, including dozens of fishermen convicted of poaching in Australian waters.
The agreement may allow convicted inmates such as drug smuggler Schapelle Corby and some members of the Bali Nine to serve out their sentences in Australia, but there are reports that the deal does not include Australia drug traffickers on death row.
The agreement does not allow for the home country of those who have been convicted to vary the original sentences they received in the other country.
Indonesia’s Minister of Law and Human Rights Hamid Awaluddin has told the ABC that those on death row, including the two Bali nine ringleaders Andrew Chan and Myuran Sukumaran, would not benefit from the deal.
“There's one problem. Since you don't have the death penalty and we do have a problem later on in terms of executing. So my conclusion for the penalty is probably a very low chance since our law still provides execution for the death penalty,” he said.
Families react
The father of Bali Nine drug courier Scott Rush, who is sentenced to life imprisonment in Inonesia has welcomed news of the deal, which is expected to be negotiated in Bali today.
Lee Rush from BRISBANE's western suburbs says if his son is eligible for the program, he may be able to return to Australia before the end of the year - to serve the rest of his prison term.
Mr Rush says the move would strengthen diplomatic links between Australia and Indonesia, as well as making prisoners' lives more comfortable. “It will also relieve the cultural and linguistic pressures on prisoners within the present situation within Indonesia. If the program gets signed off, this coming September, it may allow the release of Australian prisoners, maybe before Christmas. It would certainly ease the financial and emotional burden on families with children there.”
Vicki Czugaj, the mother of Bali Nine member Michael Czugaj, has also welcomed the deal, if her son had his sentence cut.
"It would be good if it was the same deal as Indonesia where they have reductions but I don't really know what is going to happen," she told ABC radio.
Mrs Czugaj said her two oldest sons were in Indonesia and expected to visit Czugai in jail Thursday to tell him the news. He is serving a 20-year sentence for his role in the conspiracy to smuggle 8.3 kilograms of heroin from Bali to Australia.