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Arts Minister George Brandis is taking almost $105 million out of the council's annual budget to set up his own excellence in arts program within the Attorney-General's Department.
"Arts funding has until now been limited almost exclusively to projects favoured by the Australia Council," he said in a statement on Tuesday.
The new program will take the preferences and tastes of Australian audiences into account in deciding how to distribute funds to a wide range of arts companies and artists.
The government department will also take back control of the Visions of Australia and Festivals Australia programs, which the previous Labor government transferred to the Australia Council.
The council will also bear the brunt of cuts across a range of arts and cultural programs, taking a $7.2 million trim to its budget over four years.
However, Senator Brandis says the Australia Council will still be the nation's principal arts funding body with an annual budget of about $185 million.
He doesn't anticipate any cuts to the 29 major performing arts companies the Australia Council funds.
The National Gallery of Australia also faces $400,000 in cuts, expected to come from its security budget.
WHAT'S IN THE BUDGET FOR ARTS
* New $104.7 million excellence in arts program, funded by cutting the Australia Council's budget.
* $13.2 million in other cuts to arts and cultural programs including Screen Australia and the Australia Council.
* $100,000 annual cut in funding to the National Gallery of Australia.
