The candidates will face an hour of questioning from a panel of journalists in the capital, Canberra.
Correspondents say the economy and the issue of asylum seekers are likely to dominate the debate.
Current opinion polls put Tony Abbott and his Liberal-National coalition in the lead for the September 7 election.
However, Kevin Rudd’s Labor Party has significantly narrowed its lead since he ousted his predecessor, Julia Gillard, in June.
Kevin Rudd told reporters that Tony Abbott’s poll lead meant the pressure would be on the opposition leader in the debate to justify his budget plans.
“Based on today’s polls if there was an election yesterday Mr. Abbott would be prime minister today and therefore he can’t be evasive tonight about where his A$70 billion ($65 billion) in cuts in health, education and jobs will fall,” said.
Tony Abbott said it would be clear to Australians well before polling day “exactly what we are spending and exactly what we are saving”, AFP reports.
Sunday’s debate, which begins at 18:30 local time, is the first of three such possible meetings before polling day.
Labor last week announced an A$200 million package to assist the car industry.
Tony Abbott, meanwhile, pledged to repeal Australia’s carbon tax at his first campaign event in Brisbane.
Both candidates have also already been campaigning on the heated topic of immigration, and how to stop illegal migrants reaching Australian shores.
Labor has been hit by the loss of two candidates in the past week. Kevin Rudd demanded that Geoff Lake, candidate for the safe seat of Hotham in Victoria, withdraw after it emerged he had abused a woman with a disability during a council meeting a decade ago.
Meanwhile the Labor candidate for the Queensland seat of Kennedy, Ken Robertson, stood down from the race after calling Tony Abbott a racist and “very bigoted” in an interview.
Ken Robertson said he was withdrawing “in the interests of ensuring that this matter does not distract from Labor’s campaign for a fairer Australia”.
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