People hold the Aboriginal flag during an "Invasion Day" rally on Australia Day in Melbourne Photograph:( AFP )
Morrison said the deal means 'the flag can be used on apparel, sports grounds, artworks and in any other medium without having to ask for permission or pay a fee'
The Australian government bought the rights to the Aboriginal flag worth $14 million so it can be freely used.
The announcement was made by Prime Minister Scott Morrison who said "We have freed the Aboriginal flag for Australians."
The move has resolved a commercial dispute that had restricted sporting teams and Aboriginal communities from reproducing the image.
For the deal, the Australian government held negotiations with Aboriginal artist Harold Thomas, who designed the flag in 1971.
The government has paid $20 million to Thomas to extinguish licences held by a small number of companies which have stirred controversy since 2018 by demanding payment for the flag's reproduction.
Now, the flag can be used on sports shirts, sporting grounds, websites, and in artworks without permission or payment of a fee, the government said on the eve of the Australia Day national holiday.
''I hope that this arrangement provides comfort to all Aboriginal people and Australians to use the flag, unaltered, proudly and without restriction,'' Thomas said of his deal with the Australian government.
"I am grateful that my art is appreciated by so many, and that it has come to represent something so powerful to so many."
Minister for Indigenous Australians Ken Wyatt said the flag had become an enduring symbol for Aboriginal people.
"Over the last 50 years we made Harold Thomas' artwork our own - we marched under the Aboriginal flag, stood behind it, and flew it high as a point of pride," he said in a statement.
"Now that the Commonwealth holds the copyright, it belongs to everyone, and no one can take it away."
The deal will also see the Australian government set up a scholarship in Thomas' honour worth $100,000 for Indigenous students.
Australia Day celebrations, marked with a national public holiday on January 26, have become controversial because the date is seen by indigenous Australians as marking the invasion of their land by Britain.
It is the date a British fleet sailed into Sydney Harbour in 1788 to start a penal colony, viewing the land as unoccupied despite encountering settlements.
(With inputs from agencies)