The BMC rider posted a staggering time of 14min 56sec to finish five seconds ahead of Tony Martin (Etixx-QuickStep), with Fabian Cancellara of Trek Factory Racing rounding out the podium in third, a further second back.
Dennis, a former UCI Hour Record holder, rode at an average speed of 55.446km/h over the 13.8km course in and around Utrecht. He became just the seventh Australian to wear the yellow jersey.
"I've broken a dry spell of wins and what a way to do it," Dennis said. "I left it all out there; I went off harder than what I thought I should have and I came back harder than what I thought I could."
His ride was the fastest individual time trial in Tour de France history, beating Briton Chris Boardman’s previous mark, which was set in 1994.
The first rider out of the blocks and on to the flat, fast and technical course was Daniel Teklehaimanot of the MTN-Qhubeka team, the first Eretrean to ride the Tour, and like many of the riders who came after, his time in the hot-seat was brief.
Next to lead was Jos van Emden (LottoNL-Jumbo) who only lasted until Dennis came through with his thundering ride, producing a 15 seconds advantage.
From that point all the Australian had to do was sit and wait as many of the biggest names - Tom Dumoulin (Giant-Alpecin), Martin, Cancellara, Chris Froome (Sky), Alberto Contador (Tinkoff-Saxo) and Vincenzo Nibali (Astana) - tried but fell short of his incredible performance.
"It was nerve-wracking watching the screen," Dennis said. "I didn't expect to go that fast time-wise. When I got back to the bus, I was told that it was the quickest time trial by my friend back in Adelaide. So that was a nice little bonus, you could say."
While the yellow jersey was the goal, the reality of the victory is still sinking in. "We went with the tactic of going off early," Dennis said. "There's no stress, you don't have to sit around all day, just set a benchmark and make everyone else chase me.
"It worked out perfectly. Tour de France, yellow jersey, it's a dream. I have always wished to be in this position and now I am."
"We are extremely excited and proud of Rohan's performance today," said Jim Ochowic, BMC's team president and general manager. "It is a dream because we planned this for so long and put so many man hours into the preparation.
"I was convinced that his performance would be at such a level that it would have taken somebody very, very good to beat him today. And it didn't happen."
The 25-year-old Australian also leads the points and young rider classifications heading into tonight's 166km stage from Utrecht to Zelandem.