The nation is one of the only developed countries in the world not to have a space agency.
Acting Industry Minister Michaelia Cash said it was "crucial" that Australia capitalised on the rapid growth of the global space industry.
It follows a domestic industry review which had called for a dedicated body to be established.
"The agency will be the anchor for our domestic co-ordination and the front door for our international engagement," Ms Cash said.
Political and industry leaders hope it will lead to thousands of new jobs.
The Australian government estimates the global space industry to be worth more than A$400bn (£235bn; $318bn).
Ms Cash is expected to announce further details at the International Astronautical Congress in Adelaide this week.
The conference will be attended by thousands of global space experts, including the heads of other national agencies and private companies.
Australia and Iceland are the only OECD nations without a space agency, according to the Space Industry Association of Australia.