The treaty settles a long-running border dispute but the sharing of the Greater Sunrise gas fields remains under negotiation.
Australia and Timor Leste have signed a treaty at the United Nations defining a new maritime border between the two nations.
Speaking at the UN headquarters in New York, Australia's Foreign Minister Julie Bishop hailed a "new chapter in Australia – Timor-Leste relations".
"The treaty is an important step that opens the way for developing a rich, shared resource, the Greater Sunrise gas fields."
But while the treaty settles the sea border dispute, the disagreement over how to share the potentially lucrative gas field is ongoing.
Australia has offered to share profits 80-20 in Timor Leste's favour, but with the oil and gas processed in Darwin.
Timor Leste wants a 70-30 split but with processing done in its own country to encourage the growth of a domestic processing industry.
Timor Leste's borders minister Agio Pereira signed the treaty with Ms Bishop.
He said the signing of the treaty was a "momentous day" that would be "recorded in Timor Leste's history".
But Mr Pereira also said the negotiations over the gas field was "tough".
"They were not meant to be easy," he said.
"We look forward to continuing the important discussions."
The United Nations Secretary General António Guterres said the deal was a further step in giving full sovereignty to Timor Leste, which only gained full independence from Indonesia in 2002 after a referendum that was supported by Australian peacekeeping troops.
Timor Leste succeeded in its bid to push the border out halfway between the two countries, placing much of the oil and gas fields, worth as much as $A56 billion, in its territory.
- with AAP