Australia's world-first plan for plain cigarette packaging inched closer Thursday when the legislation passed through the upper house of parliament.
But it faces the threat of a legal challenge with British American Tobacco Australia (BATA) saying it will take action once the laws come into effect.
Under the proposed legislation aimed at reducing Australia's 15,000 annual smoking-related deaths, cigarettes will be sold in drab olive-brown packs with prominent health warnings such as diseased gums and hospitalised children.
Big tobacco companies argue it is unconstitutional for the government to remove their trademarks and other intellectual property without compensation.
"The result of BATA's legal challenges could force Health Minister Nicola Roxon to pay tobacco companies billions of dollars for the removal of trademarks, brands and pack space," the company said in a statement.
The new laws are due to come into effect in December 2012.
While they secured upper house approval after lengthy procedural delaying tactics by the conservative opposition, the legislation must now return to the lower house for a final rubber stamp to minor amendments.
Roxon said the passage of the laws was one of the most significant public health measures in Australia's history and the government would not be intimidated by big tobacco.
"Plain packaging means that the glamour is gone from smoking and cigarettes are now exposed for what they are, killer products that destroy thousands of Australian families," she said.
Roxon insisted the government was prepared for legal action.
"We won't be bullied by tobacco companies threatening litigation and we are prepared to fight them if they do take that step," she told reporters.
The plans are being closely watched by other countries considering similar policies, including New Zealand, Britain and Canada.
The tobacco giants claim there is no evidence that plain packaging will reduce smoking rates and complain that counterfeit products will flood the market, reducing their profits.