A three-judge panel unanimously threw out the previous ruling in 54-year-old Maria Elvira Pinto Exposto's case, her lawyers told CNN.
"An appeal will be filed in the Federal Court -- the final appeal," lawyer Muhamed Shafee said, who added his client was "a strong person."
The grandmother and mother of four was arrested in December 2014 while transiting through the Malaysian capital Kuala Lumpur on a flight from Shanghai to Melbourne.
She was found in possession of 1.1 kilos (2.4 lb) of crystal methamphetamine and faced a mandatory death penalty under Malaysia's draconian drugs laws.
Exposto claimed she had no knowledge of the drugs in her bag and had been scammed by a boyfriend she met online, according to CNN affiliate, SBS News.
According to SBS, Exposto's lawyers said she had gone to Shanghai to file documents in relation to her boyfriend's retirement from service in the US army. When she left China, Exposto claimed she was handed a black backpack at the last minute, which she was led to believe only had clothes inside. The report did not say who handed her the backpack.
The backpack was flagged as suspicious by Malaysian customs, and a search discovered a secret compartment stitched into it, which had packages of crystal methamphetamine inside.
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