Local businesses have agreed to stop selling bottled water and free water fountains will now be installed in the town.
The voluntary boycott was triggered by concerns of the environmental impact of bottling and transporting water.
"Bottled water has a role to play in various parts of Australia and many parts of the world but we don't really need it as we have a wonderful municipal water supply," local businessman Huw Kingston, who led the campaign, told Reuters news agency.
"We're not a bunch of raving greenies but this is us showing we can work together as a community for sustainability."
'Better for your wallet'
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"We're not a bunch of raving greenies but this is us showing we can work together as a community for sustainability"
Huw Kingston,
Bundanoon businessman
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The vote in Bundanoon prompted the premier of New South Wales state earlier this week to announce an immediate ban on state departments and agencies buying bottled water.
"Tap water isn't just better for the environment, it's better for your wallet - you can refill your drink bottle 1,350 times for the average cost of a bottle of spring water," Nathan Rees said.
Environmental groups like WWF have campaigned against bottled water, saying resources are wasted in bottling and transporting water which may be no safer or healthier than tap water while selling for up to a thousand times the price.
But Geoff Parker, director of the Australasian Bottled Water Institute Inc, a group which represents the industry, said the bans were disappointing.
"The environmental footprint of one bottle of water of locally produced water would be much smaller than a tin of canned tomatoes imported from overseas, some imported cheese, or French champagne," he told Reuters.
"We need to keep it in perspective."