Shops will also be forced to keep cigarette packets out of sight under a tough new anti-smoking drive agreed by the government of New South Wales state, of which Sydney is the capital.
"It is a disgusting habit. For many adults it's a one-way ticket to a cancer ward or the morgue, but the children don't get the choice," state premier Morris Iemma told reporters.
Police would be empowered to issue on-the-spot fines to motorists smoking in cars carrying children under the age of 16, enforcing the law in the same way they did a ban on mobile phone use while driving, he said.
Iemma said the ban on shop displays of cigarettes was essential to protect children.
"There's only one reason why the tobacco companies do this sort of glossy advertising in shops and supermarkets -- and that's to keep smokers hooked and hook our kids," he said.
The move was welcomed by Australia's Heart Foundation, which said smoking was the single biggest cause of heart disease and cancer.
"Tobacco kills 15,000 Australians every year and worryingly, nine out of ten smokers start when they are children," said chief executive Tony Thirlwell.
The Australian Medical Association also welcomed the new laws, saying young lungs were exposed to high concentrations of tobacco smoke in the confined space of a car.