It will be the first time the two countries have taken part in the Games since they started in 1963.
The Pacific Games Council (PGC) rubber-stamped a proposal to allow Australia and New Zealand to take part in four sports - rugby sevens, sailing, taekwondo and weightlifting - at its General Assembly in Port Moresby.
The announcement follows a Memorandum of Understanding (MoU) signed between Robin Mitchell, President of the Oceania National Olympic Committees (ONOC), and Vidya Lakhan, chairman of the PGC.
Oceania was the only region without a Continental Games and athletes from the region had to go to other competition and regions to try and qualify for the Olympics.
"On behalf of ONOC, I'm very pleased to be here to sign the MoU on behalf of the National Olympic Committees," Mitchell told insidethegames.
"It's been a process that has taken us a little while but I think the outcomes are good.
"It's particularly good for us in the sense that the Pacific Games Council is in control on the way we move forward.
"I think its important to recognise that both Australia and New Zealand want to take part in our Games."
Lakhan claimed one of the main reason for the delay in admitting Australia and New Zealand was the fear by several island nations that the two countries would dominate and the Pacific Games will lose its tradition and culture.
Lakhan has assured the 22 member countries that as they move forward, they will always protect the interest and rights of the member countries.
The four sports Australia and New Zealand will be allowed to compete in initially were chosen because it is believed that the other Pacific countries could compete against them.
"Let's invite them, let's play with them, let's trial and see how things develop," Lakhan said.
"If it doesn't work it doesn't work.
"But if it works, or if we have to tweak a bit here and there and make some changes, then let's proceed that way."
It is hoped that the expanded event will attract more sponsorship and development funds from the International Olympic Committee (IOC).
"The resources of the IOC are quite considerable and there's no way we can match that," said Lakhan.
"For me, I think for the Pacific Games Council this is a historic event, entering into a new era which has taken us a very long long time."
The Games, which Port Moresby was awarded in 2009 ahead of rival bids from American Samoa, Papua New Guinea, Solomon Islands, Tonga and Vanuatu, is due to take place between July 4 and 18.
It will feature nearly 4,000 athletes taking part in 25 sports. [InsideTheGames]