The government says the move will help Australia cash in on the increasingly lucrative space industry - and Australian scientists are eager to get started.
In the 1960s, Australia was a major player in the space race.
It was the third country in the world - behind Russia and America - to launch its very own satellite into orbit, from Woomera, in South Australia.
Doctor Brad Tucker, an astrophysicist from Australian National University, says despite taking an early lead in space exploration, Australia has fallen behind.
"We started the race. We were running the race before everyone else joined in. And then we stopped running. And now the race has been left to the individuals to carry on the marathon."
Most developed nations, including New Zealand, have created space agencies of their own.
And now, fifty years since Australia's first launch, the federal government has renewed its commitment to space exploration.
Federal Minister for Education and Training Simon Birmingham has announced plans for an Australian space agency.
"From the extensive consultation process to date, one point is overwhelmingly clear. The case for establishing an Australian space agency is compelling and so I am pleased today to announce that the Australian Government will be establishing a national Australian space agency."
Minister Birmingham says a national space agency will help Australia cash in on a $400 billion international industry.
"The global investment in expenditure in space is already big dollars. Our challenge, and the work of this agency, will be to help ensure Australia captures more of that, that we become a country that gets more investment, more dollars from more space companies here in Australia."
The government says it won't be an Australian version of NASA, but astrophysicist Dr Tucker is nonetheless excited.
"Ultimately,we can get to the level of NASA. But it is not just putting humans on Mars. That's not the first step. That wasn't even the first step with NASA. What we're talking about is a body, a framework of money and support for us to develop our own infrastructure, whether that's satellites, whether that's ways to get into space, whether that's ways to get stuff down from space."
A government-appointed board is working on defining the space agency's purpose and is due to report back in March next year.
The announcement comes as a week-long International Astronautical Congress begins in Adelaide.
Thousands of scientists and space experts are attending, including entrepreneur Elon Musk, who has developed rockets for private space travel with his company, SpaceX.
