Several councillors described the decision as probably the biggest ever faced by the council.
It came at the end of almost two hours of discussion and despite strong opposition by the three Cromwell councillors.
Council chief executive Phil Melhopt had proposed the council rethink the way drinking water and wastewater schemes were funded throughout the district, to remove inequities.
If the cost of schemes was spread equally across all scheme users in the district, it would be fairer, he said.
Mr Melhopt also suggested the four community boards should give up their delegated authority to make decisions on water services in their respective areas and hand decision-making over to a council committee.
Residents were consulted during the annual plan process but only 2.5% of the district's residents aired their views and reaction was mixed.
Three of the four community boards - Maniototo, Vincent and Roxburgh, agreed to give up their authority to make decisions on water services, but Cromwell preferred the status quo.
''This decision is probably the biggest one we've ever faced - it's momentous - so do we need to rush it?'' Central Otago deputy mayor Neil Gillespie, of Cromwell, asked.
He argued it was better to have a policy and funding model in place before any decisions were made.
''Taking away the delegation is taking away the ability for strong communities to control their own destiny.''
Cr Gordon Stewart, of Cromwell, said the idea of cross-boundary subsidies was ''bizarre''. Boards had spent 24 years calculating ''user pays'' on all the services in their area and making prudent funding decisions on various projects.
Cr John Lane, of Roxburgh, said district-wide funding would ''take the peak out of the spikes'' in funding for new drinking water and wastewater schemes.
The decision on this topic was the ''most important this council will make in its lifetime'', Cr Martin McPherson, of Alexandra, said.
Vincent board chairwoman, Cr Clair Higginson, said residents were thinking more about being part of Central Otago, rather than being parochial.
The council voted seven votes to three to hand over the boards' decision-making on water services to the council's infrastructure committee.
Central Otago Mayor Tony Lepper abstained from voting. No decision was made on any changes to the current water services funding model, and the council left that matter for the committee to discuss.
