Transgender people and those of ambiguous sex will now be able to list their gender on passports with an 'X' if their choice is supported by a doctor's statement.

Previously, gender was a choice of only male or female, and people were not allowed to change their gender on their passport without having had a sex-change operation.

Senator Louise Pratt, whose partner was born female and is now identified as a man, said the reform was a major improvement for travelers who face questioning and detention at airports because their appearance does not match their gender status.

"'X' is really quite important because there are people who are indeed genetically ambiguous and were probably arbitrarily assigned as one sex or the other at birth," Pratt said. "It's a really important recognition of people's human rights that if they choose to have their sex as 'indeterminate,' that they can."

Foreign Minister Kevin Rudd said the new guidelines removed discrimination on the grounds of gender identity and sexual orientation.

"This amendment makes life easier and significantly reduces the administrative burden for sex and gender diverse people who want a passport that reflects their gender and physical appearance," Rudd said in a statement.

Attorney-General Robert McClelland said while the change would affect few Australians, it was important because it would allow them to travel free of discrimination.