The decision comes as support for marriage equality reaches an all time high, with a recent poll revealing that 72 per cent of Australians believe gay marriage should be legalised.
"Support for marriage equality from the Labor Party in Australia's largest state will send a message that the reform is back on the agenda and momentum is unstoppable," Australian Marriage Equality national director, Rodney Croome, has said following the announcement.
A motion that would have forced Labor MPs to vote along party lines was narrowly defeated 352-284 on Sunday.
The ballot was a closer contest than many were expecting, according to the Australian Associated Press.
Just one day earlier, a motion binding Tasmanian state Labor MPs to vote in favour of same-sex marriage was passed.
According to the Crosby/Textor survey, a majority of Australian Christians support marriage equality.