Announcing the initiative in Sydney on Sunday, federal Youth Minister Kate Ellis said the voluntary code of conduct will help reinforce positive body images for young Australians.
Ms Ellis unveiled a body image friendly symbol which will be awarded to industry organisations that implement the changes.
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"It will give (consumers) the opportunity to personally tell the fashion, beauty, media and modelling industries what they want - that they no longer want to see already thin models who have great chunks digitally removed and cut out of their thighs and waist to appear even thinner," Ms Ellis said.
The voluntary code of conduct will dissuade organisations from digitally enhancing images and encourage them to tell consumers when the image has been altered.
It encourages using healthy sized models over the age of 16 and asks fashion retailers to stock a wider variety of sizes for their customers.
'Momentum for change'
Ms Ellis said while the code of conduct is not compulsory, she believes there is already momentum for change in the beauty and fashion industries.
"We are not implementing a code of conduct that's compulsory and we're not taking a legislative approach to punish those who don't comply," she said.
"That is not what we are trying to achieve here. Instead, the government is encouraging industry leadership, genuine commitment and real action to support positive body image."
Ms Ellis said she is prepared for criticism that the code of conduct does not go far enough.
"I have absolutely no doubt that in coming days there will be critics who think that this new award scheme, this symbol, will amount to nothing," she said.
"The truth is, that's possible. But I don't think it's probable."
