Former tennis professional John Alexander was re-elected in Bennelong division after stepping down over a dual-nationality row.
Labor’s Kristina Keneally enjoyed a 7.9% swing in support in her favour but it was not enough to win the seat.
The citizenship crisis forced nine Australian MPs to resign.
They were found to hold dual nationality – something politicians are barred from by Australia’s constitution.
Mr Alexander has since renounced his British citizenship and has now won re-election – as Deputy Prime Minister Barnaby Joyce did two weeks ago.
The vote had been seen as a test of the credibility of Prime Minister Malcolm Turnbull’s ruling Liberal-National coalition. Opinions polls suggested Mr Alexander could lose the vote, costing the coalition its wafer-thin majority and forcing it to rely on independents in parliament.
Mr Turnbull was ebullient as he addressed cheering supporters.
“Thank you Bennelong, the people of Bennelong have put their faith in this man,” he said, raising Mr Alexander’s arm in triumph, according to Reuters news agency. “Liberals have come from across the state, across the nation.”
But while Ms Keneally conceded defeat, she said the swing in her favour showed voters were fed up with Mr Turnbull.
“The verdict is in, the message is clear, we have had enough of your lousy leadership. Malcolm Turnbull injected himself in this campaign, he owns this result.”
Labor has accused the government of whipping up “China-phobia” – and had hoped that the large number of Chinese-origin voters in Bennelong might punish the government for it.
Mr Turnbull has unveiled plans to make all federal politicians clearly declare their citizenship status to avoid a similar crisis in the future.
Under the new plan, politicians will be obliged to make a formal declaration about their citizenship status, as well as provide details about the time and place of their birth, and the time and place of birth of their parents.
If any politicians formerly had citizenship of another country they will also be required to detail when and how they renounced it. (Courtesy BBC)