"The whole plane turned around to see what was going on - people were freaking out because it was in the middle of the air," the passenger, who wanted only to be known as Ben, said.
"The flight attendants managed to get the door of the toilet open and a bit of a cloud of smoke came out as they opened the door."
It appeared the woman at first tried to hide her cigarette butt before admitting she was smoking.
She was taken back to her seat and when the plane arrived at Wellington, passengers were asked to remain seated after landing until police had escorted the woman off the plane.
She was issued with an "unruly passenger notice" - an infringement which carries a $500 penalty - a police spokeswoman told the Herald.
Ben later saw the woman, who appeared in her mid-30s, being questioned at Customs.
"I said to her Good on you for putting the whole f***ing plane at risk...She got a bit s***ty about it and told me where to go."
"Wellington Airport police were contacted just after 10.30pm [on Sunday] night when the cabin crew on a flight from Brisbane discovered someone smoking in a toilet," a police spokeswoman said.
"Police spoke with the woman when she arrived in Wellington, and she was issued an 'unruly passenger notice' which carries a fine of $500. This was issued on behalf of the Civil Aviation Authority."
A spokesperson for Virgin Australia said it could not comment on the incident as it was a "federal issue", and in the hands of the police.
Wellington Airport also declined to comment on the incident.
