Bridget McKenzie has resigned from cabinet after an investigation found she had two undeclared conflicts of interest relating to sports grants.
But Prime Minister Scott Morrison has stood by the way in which the former sports minister dealt with $100 million in community grants before the last election.
An auditor-general report released on January 15 had two key criticisms of the Community Sport Infrastructure Program.
They were that the award of grant funding was "not informed by an appropriate assessment process and sound advice" and that the successful applications "were not those that had been assessed as the most meritorious in terms of the published program guidelines".
Labor and a number of crossbenchers called for the minister to be sacked over what appeared to be blatant pork-barrelling of marginal seats ahead of an election.
However, an investigation by the prime minister's own department boss Phil Gaetjens found there was a "statistically similar ratio" when comparing the rate of grant approvals to marginal seats to those of other seats.
Mr Gaetjens identified the need for greater transparency around ministerial discretion in grants, but not getting rid of such discretion.
"What the secretary has made very clear is that she has exercised that discretion and in his view, that has not been done with the political considerations that others have suggested," Mr Morrison told reporters in Canberra.
But, in a finding which led to the minister's resignation, Mr Gaetjens determined she was a member of a gun club that received a $36,000 grant but had not properly declared it.
There had also been an undeclared conflict of interest in terms of her membership of Field and Game Australia, which received grants in the Northern Territory and Warrnambool.
Mr Morrison said where "deficiencies have been identified in transparency and documentation" that would be remedied.
But he added that the government would now consider how the program might be extended in the May budget.
Senator McKenzie, who was agriculture minister and also resigned as deputy Nationals leader, said in a statement she was committed to staying on in parliament and fighting for rural and regional Australia.
"I have always taken my role as a Minister of the Crown very seriously and I understand that the community expects parliamentarians to abide by the highest standards," she said, adding that she accepted the inquiry report.
"I maintain that at no time did my membership of shooting sports clubs influence my decision making, nor did I receive any personal gain.
"However, I acknowledge that my failure to declare my memberships in a timely manner constituted a breach of the prime minister's ministerial standards."
She also stood by the idea of ministerial discretion in approving grants, saying it was "important to our democratic process".
Labor leader Anthony Albanese said it was "about time" the minister resigned.
"But this scandal is bigger than one minister, and we still need to get to the bottom of these tawdry sports rorts," he said.
It is widely expected Queensland minister David Littleproud will take over as Nationals deputy leader.
Party members will meet in Canberra on Tuesday ahead of parliament resuming for the year on Tuesday.
Discussions continue on a Senate inquiry into the issue, which would also examine any possible role by the prime minister's office in the grants process.
Greens deputy leader Larissa Waters said it showed why a national integrity commission was needed.
Australian Associated Press