Holidaymakers who take jobs during their trips will now be made to pay 19% tax on each dollar they make - instead of the 32.5% first proposed.
The U-turn in policy comes after “outcry” from both the country’s tourism and farming industries, BBC News reports.
Tourism businesses have argued that implementing the tax would put off backpackers for visiting Australia; while farmers believe the policy could affect their labour supply during harvest months.
Around 600,000 backpackers travel to the country each year with a large number choosing to work picking fruit.
The Australian government had predicted it would generate A$500m from the tax, which was first suggested as part of its 2015 budget.
To counterbalance the lower tax rate, passengers departing the country will now be taxed an extra A$5 from January 1 next year.
Treasurer of Australia, Scott Morrison told media in Canberra: "We recognise absolutely the important part that backpackers play in the overall tourism industry."
"It is an important sector for the tourism industry, also a very important source of labour in the agricultural sector, particularly for seasonal labour."
Morrison added that the cost of a working holiday visa application would also be cut by A$50 to A$390 (£230).
Currently, backpackers are not eligible to be taxed until their income exceeds A$18,200 a year.