Badgerys Creek in the city's western suburbs had already been selected as the site, with Prime Minister Malcolm Turnbull signing off on its long-awaited construction.
It is scheduled to open in the mid-2020s, easing pressure on Sydney's Kingsford Smith Airport, the main gateway into Australia which is reaching capacity.
"The need for an airport in western Sydney has been screamingly obvious for many years," said Turnbull, adding it would be a catalyst for investment in the area.
"We are getting on with the job, and this airport will be built. Tens of thousands of jobs will be created. It will transform the economic opportunities in western Sydney."
The first stage will see one runway constructed, able to handle Airbus A380s and 10 million people each year, with a second expected to be needed by 2050.
"The important point is the airport is being planned for future capacity expansion," Urban Infrastructure Minister Paul Fletcher said.
"We are taking decisions that allow Sydney and Australia's aviation capacity needs to be met not just over the next 10 or 20 years but over the next 30, 40, 50 years and beyond."
Kingsford Smith Airport, which is eight kilometres (around five miles) from the city centre, handled 39.7 million travellers in 2015 and is reaching its limit with passenger numbers through Sydney forecast to more than double in the next 20 years.
It is also subject to flight restrictions between 11 pm-6 am, with Badgerys Creek, about 45 kilometres west of Sydney's central business district, expected to be curfew-free given that fewer people live nearby.
Badgerys Creek has been a potential site since 1986 with the federal government buying about 1,800 hectares (4,446 acres) in the area and the surrounds kept largely free of development since then.
But not everyone is happy, with local government body, the Western Sydney Regional Organisation of Councils (WSROC), saying the signing off on plans was premature.
"This is an airport being approved without flight paths, without commitment to a rail line and without a solid plan for jobs," said WSROC president Stephen Bali.
"WSROC has previously called for the government to secure a solid infrastructure plan for the airport, including a heavy rail link to the site from the start of operations."
Fletcher insisted the environmental impact statement set out a series of indicative flight paths and that the airport would be "rail ready", with improvements to road links also part of the plan.
Source: AFP
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