The remains of the digger were discovered in 2017 before archaeologists identified them as Australian.
A group of Australian Army soldiers were present at the ceremony on Friday to honour the unknown man.
Chief of Army Lieutenant General Simon Stewart said it was a "genuine and rare honour" for serving troops to lay an unknown soldier to rest.
"Army's commitment to identifying our fallen soldiers is an important duty," he said.
"And our ongoing work continues to identify unknown World War I soldiers and bring peace to their families."
The ceremony was conducted at the Commonwealth War Graves Commission's Tyne Cot Cemetery in Zonnebeke, Belgium.
The man is believed to have fought in the Battle of Menin Road in 1917, alongside British and South African troops, where Australian forces sustained some 5100 casualties.
It was essentially a frontal assault on entrenched German positions, with the battle noted for the intense nature of British artillery support.
The battle was successful, giving Allies more ground on the war's Western Front.
World War I was one of Australia's costliest wars, the Australian War Memorial says.
Of nearly half a million enlisted men, 60,000 were killed and 156,000 wounded or taking prisoner.
© AAP 2022
Image: Australian War Memorial