The new airport, to the west of the city, "will be a major catalyst for jobs and economic growth in Western Sydney, injecting more than AU$1.9 billion (£1.1 billion) into the economy during the construction phase alone, the government said.
The second airport is "a vitally important project for Western Sydney, for Sydney, and the nation, which is why the coalition government ended decades of indecision by committing to the project in 2014," the government said.
The government decided to take on the project after Sydney Airport Group, the owner of the current Kingsford Smith airport, said it has not accepted a notice of intention (NOI) to build and operate the new Western Sydney airport at Badgerys Creek.
Sydney Airport Group had ‘right of first refusal’ over the new airport project.
"Since the project was announced by the Commonwealth in April 2014, Sydney airport has undertaken extensive work to determine the likely demand and growth potential, construction costs, risk profile and financial returns of WSA. Throughout that time Sydney airport also consulted openly and extensively with the Commonwealth government," it said.
"After taking into consideration the feedback from the recent market engagement process and investors, and the outcomes of its own evaluation, Sydney Airport determined that the terms of the NOI do not meet its investment criteria," the group said.
Sydney-based infrastructure expert Adam Perl of Pinsent Masons, the law firm behind Out-Law.com said: "Sydney Airport Group's decision had been expected ever since the government ruled out any direct financial support towards the cost of building and operating the project in December 2016."