Mr Carr said the board had considered two options for upgrading the system, one being an on-site treatment and the other pumping into the council's sewer.
Organisations such as the regional council, Fish and Game and local landowners had been consulted and the "only long-term solution had been to connect into the sewer by way of a 63mm pipe", Mr Carr said.
Rathkeale has for decades been using oxidation ponds but under the new system all wastewater will be collected and churned to a slurry in a special chamber.
The resulting greywater will be pumped to the town sewer and any remaining solids collected by a septic tank cleaning company.
Masterton district Council's assets and operations manager David Hopman said payments by Rathkeale not only covered connection costs and the development contribution but a portion was also directed towards urban network upgrades.
He said receiving the Rathkeale waste by a pressure line feeding into a manhole by Cashmere Downs would pose no problem to the capacity of the town's sewerage system.