The plan unveiled by the federal government on Tuesday will see children aged under 10 and their families released on bridging visas, if they arrived prior to July 19 last year.
The move is expected to save more than $50 million.
Immigration Minister Scott Morrison moving children out of detention was always the government’s intention.
“The arrangements extend the care and support that is provided in community based residential detention to those released on bridging visas,” he said.
“... These changes represent good policy, common sense and a compassionate response to dealing with this significant problem left to us by the previous government.”
Mr Morrison said the government would not be "watering down" current government policy, adopted in July last year.
He said 876 children remain in detention, including on Nauru.
A total of 1547 children were in residential accommodation as part of the community detention programme at the end of July.
Greens Senator Sarah Hanson-Young has called on the Minister to release all children in detention, saying the "horrendous conditions" on Nauru are unacceptable.
"Any discussion of kids in detention cannot ignore the billions of dollars being spent on cruelty to children on Christmas Island and Nauru," she said.
‘They live in a state of danger’
The developments follow allegations of the "systematic violation" of children housed at the immigration facility on Nauru.
A 53-page document by the Save the Children staff member and her colleagues detailed involving asylum seeker children, stating that no “working with children” background check system exists in Nauru.
“There have been several employees accused of physical, verbal and the sexual assault of children,” it reports.
“The employees that work in the Nauru offshore processing centre… have unrestricted access to children and their families.
“Children have been the victim of sexual, physical and verbal assaults by employees.”
One of several Save the Children staff who submitted the anonymous document to the Australian Human Rights Commission , saying children detainees face a “state of danger” on a daily basis.
“Every day that they are in detention, they face the risk of being sexually assaulted, physically assaulted, verbally assaulted,” she said.
“Every day. And neglect. There is a constant risk that anything could happen at any time and it could be by the people that are employees, it could be by other people in the community, it could be by their own families.”
She said much of the abuse was also likely to go unreported.
“If people know that they cannot be separated from their abusers, it’s not going to give them any confidence in reporting abuse,” she said.
“… If you are going to be subject to retaliation, why would you report that? If the government reportedly says it doesn’t matter what happens to you, you will not be removed, what would be the point of reporting abuse and making yourself a target?”