Indigenous Australians kicked off the celebrations with a cleansing ceremony in Sydney's Botanic Gardens.
Ceremony leader, Clarence Slockee, says white settlement has transformed indigenous people from a thriving nation into a disadvantaged minority.
"There are different names for it obviously - Australia Day, Invasion Day, Survival Day. For me personally it's Survival Day, because it's particularly for this ceremony, it's about letting people know that Aboriginal people are still here, we still exist, even though in the mainstream media, advertisments, commercials, television shows, we're invisible in this country," Mr Slockee told ABC radio.
Ahead of the event Prime Minister John Howard called on Australians to be more tolerant of other races and cultures, and warned that racial violence will be met with the full force of the law.
White supremacists have reportedly called for a rally at Sydney's Cronulla beach on Thursday, sparking concerns of a repeat of race riots at the beach last month.
In a speech to the National Press Club in Canberra, Mr Howard said the clashes brought "shame on all involved".
However he said he was optimistic for future tolerance and cultural diversity in Australia.
At an event in the capital Canberra Mr Howard announced the annual awards for Australians who have made major contributions to the community during the past year.
Professor Ian Frazer, who developed a vaccine for cervical cancer, was named as Australian of the Year and says he will use his new status to lobby government to spend more money on medical research.
Mr Frazer has spent the last 20 years working on a vaccine to combat the sexually-transmitted human papilloma virus (HPV), which causes all cervical cancer cases.
There are half a million new diagnoses of the cancer recorded each year, including around 800 in Australia. "I see two important things coming out of this," he said.
"One is obviously the chance to talk with the community and with politicians about the need for funding for more medical research. The benefits of medical research are made obvious by the sort of work we have been doing on the vaccine.
"Another is to talk with people about the great joy and pleasure you can get out of doing good for the community. Not everybody is going to find a cervical cancer vaccine but everybody can do their little bit for the community and that's what being Australian is really all about."
The vaccine was found almost by accident 15 years ago and has the potential to eradicate cervical cancer.
"We were working on how the virus that causes cervical cancer actually causes the cancer and I unexpectedly found a way of making something that looked just like the virus but wasn't infectious and that became the basis of the vaccine," he said.
Young Australian of the Year Trisha Broadbridge knows her late husband, AFL footballer Troy Broadbridge who was killed in the Indian Ocean tsunami, would be proud of her award.
Ms Broadbridge and her new husband were on their honeymoon on Phi Phi Island in Thailand on December 26, 2004 when the tsunami hit.
After the tragedy Ms Broadbridge fell into a deep depression and considered suicide but found relief in establishing the Broadbridge Education Centre on the island.
She also works with young people through The Reach Foundation to improve their self-esteem, and established the Reach Broadbridge Fund in honour of her husband.
"I'm really proud to have won the award and that's something I know that Troy would have been really proud at me," she said.
"I was really surprised to win Young Victorian to start with because I suppose for me, it is hard for me to see what other people see because it has just been normal for me to do what I did."
Mrs Broadbridge raised A$240,000 for the centre with the help of her husband's former football club, Melbourne.