The trial will let around 175 people who have received both doses of a vaccine approved by the Therapeutic Goods Administration to quarantine at home for seven days.
Prime Minister Scott Morrison expects the program, run by the state and federal governments, to let more Australians come home and boost the supply of workers from overseas.
It will also be used for air crew with Qantas, which is mandating vaccines for its employees.
The month-long trial to start in coming weeks will be used to inform future home quarantine programs for the rest of the country.
"NSW has carried the lion's share of quarantining returning Australians and will be leading the way with this trial that could set the standard for the next phases of the way we live with COVID-19," Mr Morrison said on Friday.
Compliance will be tracked by an app, already in place for an existing South Australian home quarantine program, with geolocation and facial recognition technology.
People will also be provided with a schedule for COVID-19 testing.
Mr Morrison indicated hotel quarantine, which has resulted in numerous virus leaks and outbreaks, was nearing its "use-by date".
NSW Premier Gladys Berejiklian wanted to see hotels return to housing tourists as her state worked towards vaccine targets of 70 and 80 per cent.
"Hotel quarantine has been an important line of defence throughout this pandemic but as we move towards our vaccination targets, we have to look at new ways of doing things," she said.
NSW is sitting at double and single dose rates of around 50 and 80 per cent, respectively.
It has recorded 1284 new locally acquired cases of coronavirus and 12 more deaths.
Mr Morrison saw Victoria as being on a similar outbreak trajectory as that state notched up another 510 cases and reported one more death.
Slightly more than 42 per cent of its over-16 population is fully vaccinated while nearly 70 per cent have received one dose.
"When you track what the progression of the outbreak has been in Victoria against what it has been in NSW, it's a very similar trajectory. In fact it's slightly higher," the prime minister told 3AW radio.
"The lockdowns can keep it somewhat suppressed, but it continues to grow."
Mr Morrison also cautioned against taking a higher vaccination rate for granted.
Nationally, around 45 per cent of people aged 16 and older are double-dosed, with about 70 per cent partially vaccinated.
More than 95 per cent of residential aged care workers have also received at least one jab as the national vaccine deadline for the industry kicks in.
Mr Morrison urged Queensland and Western Australia to boost vaccinations in their jurisdictions, which lag behind other parts of the country.
AAP with The Project.