Water Minister Keith Pitt on Wednesday introduced legislation to federal parliament to hand substantive powers to the basin's inspector-general almost two years after the role was announced.
The mooted "cop on the beat" for the nation's largest river network is being created alongside tough new penalties for water theft and insider trading.
Stealing the precious resource or gaming the market will be punishable by three to five years in jail for the most serious offences.
The bill also creates civil penalties for water theft with fines between $220,000 and $1.1 million for individuals and $2.2 million to $11 million for companies.
Insider trading would draw fines of up to $2.2 million.
The new measures aim to crack down on conduct that undermines confidence in water markets, while also deterring illegal water use that harms the environment.
State basin government agencies will face oversight from the new office, which will cost more than $38 million to establish and run.
Inspector-general Troy Grant, who is a former Nationals deputy premier of NSW, will take over the Murray-Darling Basin Authority's compliance functions.
Mr Grant is in the job on an interim basis until the bill becomes law.
The Productivity Commission recommended splitting the authority's compliance and management functions in 2018.
Multiple other reports and inquiries have found a lack of transparency in policing water use across the basin is fuelling suspicion and undermining confidence.
Former water minister David Littleproud announced the role in August 2019, with the plan initially receiving approval from state and territory governments.
But agreement soon evaporated, sparking major delays with the federal government taking almost two years to present a bill to parliament.
Ex-federal police commissioner Mick Keelty was the first interim inspector-general but was not armed with comprehensive powers contained in the legislation.
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