Nauru is to receive around 27 million US dollars in aid assistance from Australia, with the funding to support health, education, economic and financial management and public sector capacity-building, including policing assistance.
This comes after the closure of Canberra's detention processing camps on the island which for years propped up the island's economy.
Australia says the new arrangement represents a commitment to help Nauru restore essential infrastructure and services and to improve economic self-sufficiency.
Australia's Secretary for the Pacific Duncan Kerr says they have taken into account a whole range of issues.
"Not all will be resolved through this particular agreement, but we've got a very strong base to go forward with into the future, and this certainly puts behind us the issue of the former offshore processing centre on Nauru."
Duncan Kerr says the next stage of the relationship will be the development of a partnership agreement such as Canberra is presently negotiating with Papua New Guinea.