Nationals leader Michael McCormack knew of damning "sugar baby" allegations about his assistant minister Andrew Broad two weeks before they emerged.
Mr Broad will remain in parliament, serving his northern Victoria seat of Mallee, but Mr McCormack said it was "appropriate" he resigned from his position in the Morrison ministry.
Mr Broad was named in a New Idea magazine story published on Monday alleging he used a website to meet younger girls while away on an overseas work trip.
A woman, named as "Amy", claimed she met the married 43-year-old in Hong Kong in November for dinner and told her he was there for a "conference" but "shouldn't have been here at all".
No one has been able to answer why Mr Broad was in Hong Kong and if it was anything to do with his work.
AAP was able to verify from several sources he was not part of an Australian trade and investment delegation to China and Hong Kong led by Trade Minister Simon Birmingham in November.
The woman also claims Mr Broad lied about his age, sent her numerous text messages that turned to a "more sexual nature" following the dinner, and described himself as "James Bond".
After being alerted to the allegations, Mr McCormack urged Mr Broad to report the matter to the Australian Federal Police.
The AFP said in a statement on Monday it received Mr Broad's referral on November 8, but after assessing it found "no applicable offences under Australian law".
While "very disappointed" by the media reports, the Nationals leader is backing Mr Broad to continue in parliament.
"I want to make sure that all of my ministers, all of my members are always doing the right thing. That's why I have accepted Andrew Broad's resignation," he told reporters on Monday.
New Idea cited Mr Broad as saying he "will not be making any further comment", having referred it to police.
"I have been advised that the person making the allegation may have engaged in criminal activity," Mr Broad told New Idea.
The allegations emerged on the same day Treasurer Josh Frydenberg revealed the mid-year budget outlook.
Mr Frydenberg said Mr Broad's behaviour was unacceptable.
"Clearly that conduct is inappropriate and he's taken the necessary steps," he told Sky News.
It is the second sex scandal to rock the Nationals this year after Barnaby Joyce was forced to resign as party leader following revelations he was expecting a child with a former staffer.
Mr Broad at the time called for Mr Joyce to step down as leader amid reports of his extramarital affair.
Shadow treasurer Chris Bowen would not comment on the allegations, but said Mr Broad's resignation doesn't help the "chaos and dysfunction at the heart of the Morrison government".
Australian Associated Press
