The winger has also been suspended for two years.
The committee, chaired by John Gleeson QC with fellow members Peter Garling and Dr Jeffrey Steinweg, has informed Sailor and the ARU of their decision.
The ARU had not commented on Sailor's position when it was revealed the winger had tested positive for cocaine after the NSW Waratahs' Super 14 match against the Brumbies on April 16.
But ARU chief executive Gary Flowers said in a statement: "Wendell Sailor's behaviour has been extremely disappointing and we have no hesitation in terminating his contract.
"Australian Rugby condemns the use of performance-enhancing drugs and doping practices in sport.
"The use of any illegal drug is contrary to the ethical concepts of sportsmanship, fair play, good medical practice and is potentially harmful to the health of the individual."
He added: "His actions have been nothing short of irresponsible. He already had a track record for poor behaviour which had seen him called in front of ARU and Wallaby team disciplinary committees on several previous occasions."