Backpackers will be charged 19 per cent tax from the first dollar they earn under a federal government compromise.
The government had originally planned to make people on working holiday visas pay 32.5 cents in the dollar and scrap the tax-free threshold.
Backpackers are a vital supply of workers for the agricultural sector, with as much as a quarter of the industry's workforce in Australia on a working holiday visa.
Cabinet on Monday approved a new plan under which working holiday makers will be taxed 19 per cent on any earnings up to $37,000, starting from January 1, 2017.
Earnings above that will be taxed at the same marginal tax rates as everyone else.
There will also be more flexible arrangements to let an employer with premises in different regions engage working holiday makers for six months in one place and an extra six months somewhere else.
And the government will spend $10 million promoting Australia as a destination for backpackers, in recognition that many in the tourism and agriculture industries were concerned the original tax changes had deterred young people from coming here.
To help pay for the changes, the government will tax superannuation payments to working holiday makers who have left Australia at 95 per cent.
It will also hike departure taxes by $5, to $60, in the first increase to that charge since 2012.
Treasurer Scott Morrison said a backbench committee was "a pig in mud" with the changes and had given strong endorsement for cabinet's decision.
Mr Morrison defended the government's original decision to tax holiday makers 32.5 cents from the first dollar they earned and why it had taken so long to address industry concerns.
There was a range of proposals put up before the May 3 budget that didn't satisfy him or ensured the integrity of the budget wasn't eroded.
"I would say that when you do the work and you consult properly, you come to the right outcome," Mr Morrison told reporters in Canberra.
The treasurer insisted the change would put working holiday makers in Australia on the same footing as if they were in Canada, New Zealand and the UK.
Nationals leader Barnaby Joyce said the compromise was a win for farmers.
Farmers immediately welcomed the cabinet decision.
The agricultural community feared its temporary workforce would be decimated by a clear disincentive for backpackers to come to Australia, the National Farmers Federation said.
"The NFF has always advocated for a rate of 19 per cent as a fair and reasonable measure," president Brent Finlay said.
