Unveiling a compact that includes freedom of movement and defence guarantees, prime ministers Anthony Albanese and Kausea Natano said the two nations would work to tackle climate change, while preparing for the worst.
The treaty would also commit Australia to defend Tuvalu in the case of foreign invasion or natural disaster.
Tuvalu, with a population of just 11,000 people, is among the world's most vulnerable nations due to rising sea levels.
Two of Tuvalu's nine atolls have already largely disappeared under the waves, and climate scientists fear the entire archipelago will be entirely uninhabitable within the next 80 years.
Natano told AFP last month that unless drastic action is taken to limit climate change Tuvalu would risk "disappearing from the surface of this Earth".
The Australia-Tuvalu treaty would work to allow Tuvaluans to "thrive in their territory and retain Tuvalu's deep, ancestral connections to land and sea".
But there is also an acknowledgement that action has not come fast enough, and the impact of climate change is already being felt.
"At the same time, we believe the people of Tuvalu deserve the choice to live, study and work elsewhere, as climate change impacts worsen," a joint statement said.
"Australia has committed to provide a special pathway for citizens of Tuvalu to come to Australia, with access to Australian services that will enable human mobility with dignity."
Australia's economic reliance on coal and gas exports has long been a point of friction with its many Pacific neighbours, who face massive economic and social costs from wilder weather and rising sea levels.
The pact will likely be seen as a significant strategic win for Australia, which is competing with China to cement its influence in the Pacific region.
While Solomon Islands and Kiribati in recent years switched their diplomatic allegiances to Beijing, Tuvalu has remained steadfast in its recognition of Taiwan.
Prime Minister Natano said the treaty stood as a "beacon of hope" and a "giant leap forward" in the quest for regional stability.
The pact will have to be ratified by each country before coming into effect.
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