UPDATE: Australia have won the second Test and taken the series after a depleted Sri Lanka collapsed in their second innings at the MCG.
The home team finished the year as they started by producing a comprehensive victory that will prepare them for massive series in India and England next year.
Sri Lanka had only eight fit batsmen, finishing at 7-103, and were dismissed in 24.2 overs midway through day three to give Australia victory by an innings and 201 runs and a 2-0 lead in the three-Test series.
Man of the match Mitchell Johnson finished with 2-16 to complete a superb game which saw him claim six wickets in total, score an unbeaten 92 and force two batsmen to hospital with injured hands.
A broken thumb from the first innings meant Prasana Jayawardene was not able to bat today, while Kumar Sangakkara retired hurt on 27 after being struck on the left index finger.
Left-arm quick Chanaka Welegedara also didn't bat after he tore his hamstring early in Australia's innings.
Sri Lanka captain Mahela Jayawardene confirmed Sangakkara will need surgery on his fractured finger and will miss the dead rubber third Test. Welegedara is also out for Sydney, while Prasana Jayawardene is in doubt.
Jackson Bird produced a memorable debut with two wickets in each innings and repeatedly beat the bat during a nine-over spell today.
He forced six edges to go with two wickets and had Angelo Mathews dropped at gully before the allrounder eventually dragged Johnson onto his stumps.
Sri Lanka, starting their second innings 304 runs behind after dismissing Australia for 460, never recovered from a catastrophic start which saw them collapse to 3-3 after just two overs.
First out was Dinath Karunaratne, who was run out three balls in thanks to Johnson's spectacular lunge at the stumps after David Warner’s speedy pounce at cover had created confusion between the openers.
Then next ball Johnson claimed Tillekeratne Dilshan for a golden duck with a lifter that was edged on to his thigh guard and ballooned up to short leg.
And things went from dire to disastrous in Bird’s first over when struggling captain Mahela Jayawardena steered the ball onto his stumps as he attempted to leave it.
Bird later claimed a second wicket when Thilan Samaraweera was trapped directly in front to leave Sri Lanka reeling at 4-13.
Johnson had earlier failed to add a second Test century to his career record, left stranded eight runs short.
He hammered the bowling from the start of the day but the lively pace proved too much for Nathan Lyon, who attempted to play a big shot of his own only to lob a limp pull to midwicket.
And Bird was bowled for a duck after staying with Johnson as he moved into the 90s for the third time in his career. He also has a 96 not out to his credit.
The gulf between the two teams was emphasised by Australia’s decision to rest first Test striker Mitchell Starc while Sri Lanka may be forced to raid the Big Bash for another paceman to play in Sydney.
Aside from Welegedara's injury, Nuwan Kupegedara suffered a broken rib in the first Test in Hobart.
Starc is certain to return at his home ground and could replace Peter Siddle, who only bowled 13.2 overs in the match but picked up the final wicket.
Shane Watson, who fielded today, is out of the third Test with a calf injury and is replaced by Glenn Maxwell, while Usman Khawaja is again on stand-by as cover for skipper Michael Clarke (hamstring).
Australia squad for Sydney: M Clarke, J Bird, E Cowan, P Hughes, M Hussey, M Johnson, U Khawaja, N Lyon, P Siddle, M Wade, D Warner, M Starc, G Maxwell.