The new super-ministry, will combine the domestic spy agency, the federal police and customs and immigration departments into one office, and will be headed by current Immigration Minister Peter Dutton.
The portfolio will be modelled on the UK Home Office.
The announcement was made by Australian Prime Minister Malcolm Turnbull in Canberra who said that "it is the most significant reform of Australia's national intelligence and domestic security arrangements and their oversight in more than 40 years."
The reforms will restructure and strengthen Australia's Intelligence Community, establish a Home Affairs portfolio and enhance the Attorney-General's oversight of Australia's intelligence, security and law enforcement agencies.
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According to an official statement, Australia was facing an increasingly complex security environment, evolving threats from terrorism and organised crime, and the development of new and emerging technologies, including encryption and in view of these developments, Prime Minister had announced a review of Australia's Intelligence Community last year.
The review highlighted how changing security threats and technologies were driving the need for closer cooperation between our domestic security and law enforcement agencies.
"Government believes that the evolving and complex threats to Australia's security require more enduring and better integrated intelligence and domestic security arrangements," the statement said, adding "We have accepted the recommendations of the Australian Intelligence Community review as a sound basis to reform Australia's intelligence arrangements".
It will also establish a Home Affairs portfolio of immigration, border protection and domestic security and law enforcement agencies.
The changes will take one year to implement and are expected to be finalised by the end of next June.
Australia have been targeted by several attacks, including a cafe siege in 2014 where two hostages were killed in the terrorist attack staged by a Iran-born gunman inspired by the Islamic State militant group and the murder of a Sydney police employee in 2015 by a 15-year-old boy.
The terror threat alert level was has been lifted in Canberra in September 2014 and introduced new national security laws amid concerns of attacks by individuals inspired by the Islamic State.
String of arrests have been made by counter-terrorism police since late 2014 across the nation. The police have prevented 12 terror attacks on home soil in the past few years.
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