Letting transsexual Australians carry passports in their preferred gender without the need for a sex change will save them from needless embarrassment and delays, transgender advocates say.
The Australian Coalition for Equality said people would now be able to travel overseas without being stopped by officials because their passport doesn't match their public identity.
"From that point of view, it's a huge step forward," spokeswoman Martine Delaney.
"It's an incredible embarrassment to be a woman for years but still have a passport that says they're male."
Ms Delaney said she knew of a man who had lived as a woman for 25 years but was unable to have a sex change for medical reasons.
In this case, US customs officials had detained her because they were confused about her gender.
Ms Delaney, 53, was born a man but underwent a sex change eight years ago.
The Hobart-based transsexual spent two years in a "transition" period, but did not travel overseas during that time.
She met senior advisers to Foreign Minister Kevin Rudd at Parliament House in Canberra in July to be told about the new guidelines.
Ms Delaney commended Mr Rudd and Attorney-General Robert McClelland, saying the changes would give "greater recognition" to transgender and intersex Australians.
"The flow-on effects acknowledge these people are human beings with rights," she said.
Under new rules unveiled on Wednesday, gender reassignment surgery will no longer be a prerequisite for "sex and gender diverse" people to get a passport identifying them the way they wish.
But they will need to present a statement from a doctor supporting their preferred gender.
The changes are expected to affect only a handful of people.
Mr Rudd said the reform was in line with the government's efforts to remove discrimination based on gender identity and sexual orientation.