Ms Gillard said the union's decision was sensible.
The move follows some confusion over whether the tests would go ahead, with the AEU at first denying it had cancelled the boycott.
But politicians have warned that the establishment of a working party, which appears to have quelled union fears and allowed the tests to go ahead, must not be an empty promise.
"The tests will proceed next week as planned and now without any threat of disruption," Gillard said in a statement on Thursday.
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The Australian Education Union was refusing to hand out the tests from Tuesday, putting the government's My School in jeopardy.
It compares schools' academic scores with the results of statistically similar institutions, as well as to the national average.
The union has been concerned the website creates league tables, which rank and stigmatise poor-performing schools.
