Act's MPs will be allowed to vote according to their consciences on all pieces of legislation rather than being obliged to stick to the agreed position of their five-member caucus.
The only parliamentary votes where an Act MP will be obliged to follow the party line is on confidence and supply measures where National is guaranteed Act's total backing by virtue of the support agreement between the two parties.
The right to a free vote is a marked departure from other parties' practice of requiring their MPs to stick to the agreed caucus line unless they have special dispensation or the legislation is designated to be a traditional conscience measure, such as changes to the liquor laws.
The decision to allow a free vote could potentially block some pieces of Government legislation if the Act caucus is split.
National has 58 seats in the 122-seat Parliament and needs four votes from other parties to pass measures.
Assuming a "no" vote from Opposition parties, Government legislation would fail if two Act MPs were opposed, along with the Government's other support partners, the Maori Party and United Future MP Peter Dunne.
Act leader Rodney Hide told the party's annual conference on Saturday that Act's MPs would discuss as a caucus the way the party would vote in Parliament, but no MP would be required to vote the way of other Act MPs. "That's what having a free vote means."
He said the decision strengthened the position of the caucus against the leader, but that was important in keeping Act "honest and on track". It also meant he could not take for granted what position Act might take when National sought his backing on some measure it wanted to bring before Parliament. "I'll have to take it back to the caucus."
In a reference to Winston Peters and NZ First, and Jim Anderton and the Alliance, he said: "We do it that way because we have seen what happens to third parties with leaders who just dictate their party's vote. Those leaders end up thinking they are the party, and those parties don't last."
Asked if Act was risking looking disunited, Mr Hide said it was inevitable that MPs could disagree on certain matters "while in broad terms being on the same track" and the media needed to display maturity and accept that.
Mr Hide's remarks followed friction at the party's closed-door annual general meeting on Friday over Act's backing for a National private member's bill giving the Wanganui City Council the power to ban gang patches from public areas.
The caucus' support for the measure has been attacked by party members as a breach of the party's fundamental belief in freedom of expression. Reports from within the party suggested there had been an attempt to put a motion opposing the bill, but it was blocked by a procedural motion. Mr Hide said the AGM debate on the matter had been "robust".