Dili and Canberra have been in dispute over the issue for a decade with the matter last year taken to the Permanent Court of Arbitration in The Hague.
East Timor has now officially notified its southern neighbour it wants to end the Certain Maritime Arrangements in the Timor Sea (CMATS), which carves up future revenue from oil and gas reserves in the area.
"The government of Australia has taken note of this wish and recognises that Timor-Leste has the right to initiate the termination of the treaty," the two sides said in a joint statement.
"Accordingly, the Treaty on Certain Maritime Arrangements in the Timor Sea will cease to be in force as of three months from the date of that notification."
It did not give an exact date for notification, but added that both governments were committed to negotiating new permanent maritime boundaries.
East Timor, which gained independence from Indonesian occupation in 2002, is impoverished and depends heavily on oil and gas exports.
In 2006, it signed the CMATS treaty with Australia, which covers the vast Greater Sunrise gas field between the two nations, worth billions of dollars.
But Dili has since accused Australia of spying to gain commercial advantage during the 2004 negotiations and demanded the treaty be ripped up.
Until Monday, Australia had argued it was legal, binding and valid.
Dili officially dropped its spying case against Canberra before the UN's highest International Court of Justice in June 2015 after Australia returned sensitive documents.