The new Home Affairs portfolio -- which uses Britain's Home Office as a template -- will be run by Immigration Minister Peter Dutton in a major shake-up of national security arrangements.
"I am announcing the most significant reform of Australia's national intelligence and domestic security arrangements and their oversight in more than 40 years," Prime Minister Malcolm Turnbull said in Canberra.
"We are taking the best elements of our intelligence and national security community and making them better. As terrorists evolve their methods, we have to evolve our responses."
Canberra lifted the terror threat alert level in September 2014 and introduced new national security laws amid concerns of attacks by individuals inspired by organisations such as Islamic State.
Counter-terrorism police have also made a string of arrests since late 2014 across the nation and say they have prevented 12 terror attacks on home soil in the past few years.