The law was passed with the support of the Labor opposition, and received 43 votes in favour with 16 votes against. It was passed by the lower House of Representatives last week.
The Liberal-National coalition government said the legislation was a central tool for law enforcement and intelligence agencies in their fight against terrorism.
"By passing this Bill, the parliament has ensured that our security and law enforcement agencies will continue to have access to the information they need to do their jobs," Attorney-General George Brandis and Communications Minister Malcolm Turnbull said in a joint statement.
Australian Prime Minister Tony Abbott earlier today did not say how much it would cost to implement the law but added his conservative government would make "an appropriate upfront contribution to the cost" to the telecommunications industry.
The data retention legislation has been slammed by privacy advocates, who say Australians would be vulnerable to the misuse of their personal or private information by the nation's security agencies.
The opposition Greens party, which voted against the bill in the Senate, described the law as "a form of mass surveillance".
"The government won't disclose the costs of the scheme, is silent on the risk of unauthorised disclosure, and at no stage has been able to point to evidence that collecting the private records of 23 million non-suspects will keep people safer or reduce the crime rate," he said.
The law has also been criticised as impinging on press freedom, a charge refuted by Brandis and Turnbull who said the government had incorporated several protections for journalists.
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