People who breach copyright through illegal file-sharing could be fined up to $15,000 or have their internet connection cut off - and the onus will be on them to prove they are not guilty.
The entertainment industry hopes the law will scare people out of downloading songs or video through sites such as Pirate Bay.
The Copyright (Infringing File Sharing) Amendment Bill passed its third reading yesterday, ending two years of heated discussion and an online "blackout" protest on sites such as Facebook and Twitter.
Only the Green Party opposed it, because it felt cutting off internet access was an excessive punishment.
The bill is widely seen as an improvement, but it still retains the controversial provision to suspend internet accounts for up to six months after three offences.
After three notices for infringing copyright have been issued to an offender, the copyright holder can go to the Copyright Tribunal - chaired by a High Court lawyer - to ask for compensation of up to $15,000.
If a copyright holder wants a connection suspended, they have to apply in the District Court - but that option is available only through a ministerial order-in-council.
A spokesman for Commerce Minister Simon Power said suspension would be considered only if the tribunal process failed to have an effect.
The law will come into effect in September and the system, which will not apply to mobile networks until October 2013, will be reviewed after two years.
Labour's communications and IT spokeswoman, Clare Curran, said the option to shut off the internet had effectively been shelved.
"If an order-in-council was passed and termination was enacted, then I will be strongly recommending to my caucus that we repeal the bill."
Lowndes Jordan partner Rick Shera, an expert in internet and intellectual property, criticised what he said amounted to presumption of guilt.
Any notice from a copyright owner to the tribunal will be "presumed" to be correct. The copyright holder will not have to prove they are correct, unless the accused gives evidence or reasons showing otherwise.
"Up to 30 per cent of copyright cases fail because they can't prove that they own the copyright.
"But they won't have to prove that [unless the notice is challenged]."
Mr Shera expected the accused would have to show sufficient evidence the shift the burden of proof to the copyright holder.
"Where you have a presumption, you can expect the tribunal will require some degree of evidence. Just raising your hand and saying 'actually, it wasn't me', I don't think that's going to work."
Copyright holders will pay a fee - yet to be set - to lodge a notice with the tribunal, but Mr Shera questioned whether it would be enough to prevent a flood of complaints.
National MPs received a grilling from the internet community as the bill passed. When list MP Melissa Lee said via Twitter that she was going to listen to a "compilation a friend did for me of K Pop", she received a reply from christopherbull: "I really hope that compilation was all copyright cleared. Otherwise, you know, you'd be a glaring hypocrite."
LEE: ALL MY K POP IS LEGAL
National MP Melissa Lee spoke out strongly against illegal file-sharing this week, but does she practise what she preaches?
As the Copyright (Infringing File Sharing) Amendment bill passed its third reading, Ms Lee told the House: "Breaking a law, whether it is actually assault on a person or an assault on a copyright, should be punished, not actually excused."
But earlier in the week, she said via Twitter that she was going to listen to a "compilation a friend did for me of K Pop" - South Korean pop music.
This was replied to by @christopherbull: "I really hope that compilation was all copyright cleared. Otherwise, you know, you'd be a glaring hypocrite."
Ms Lee said last night the compilation was made of songs that were legally downloaded and paid for.
"I'm not a pirate. I have never downloaded anything illegally in my life." Earlier she had told the House she did not even know how file-sharing through peer-to-peer systems worked.
National MP Tau Henare said he had illegally downloaded music, but others, including Attorney-General Chris Finlayson and Prime Minister John Key, denied it outright.By Derek Cheng Email Derek