The toilet, in North Rd just north of Baldwin St, will be accompanied by $50,000 of road and safety improvements, including a pedestrian crossing which will be installed next year.
The announcement follows more than three years of requests to the council by businesses and residents frustrated by requests by tourists to use their toilets, plans for toilets which never eventuated and a norovirus scare.
Dunedin City Council recreation planning and facilities manager Jendi Paterson said excavation work had already started, and would be followed by construction of the foundation and power, water and sewage service connections.
Otago Community Hospice chief executive Ginny Green said the organisation was ''delighted'' by the announcement.
Last year the organisation encountered people entering the hospital to use the toilet.
Co-owner of Grid Coffee Nick Van Der Jagt said she hoped the toilet was the beginning of the council taking ''more notice'' of Northeast Valley.
If the trial toilet was removed, the cafe would have ''no other choice'' but to resume letting the public use its toilet, she said.
A Dunedin City Council spokeswoman said the council would monitor the trial over the visitor season. A decision on whether to make it a permanent fixture would depend on results.
''One of the advantages of the design of the toilet is that it is robust enough to be a permanent fixture, but it is also a portable unit that could be used elsewhere.''
Ms Paterson said Fulton Hogan would extend the kerb on the Baldwin St side of the road side and a median island would be installed in the new year.
A historic trough near the toilet site would be removed during construction and returned on completion.