Cahill, who has won 91 caps for Australia and is the country's record goal scorer with 47, has signed a three-year contract with Melbourne City.
The midfielder will play for two years then join the club's coaching staff in 2018, the team said on Thursday.
"It's the biggest player signing in the League's history, it's a red letter day for the code," Football Federation Australia's CEO David Gallop told reporters in Sydney.
"I think for many Australians when you think football, you think Tim Cahill.
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"Scoring goals, celebrating by punching the corner flag, hopefully we are going to see plenty of that over the next couple of seasons, not only in the A-League but of course for the Socceroos on the road to Russia 2018."
Cahill, 36, has represented his country in three consecutive World Cups and the Asian Cup, becoming the first Australian to score in each competition.
"I am incredibly excited to have signed with Melbourne City and ultimately the City Football Group. There is real ambition and purpose here, qualities that are immensely important to me," Cahill said in a statement.
Cahill previously played for Chinese Super League side Shanghai Shenhua, the MLS' New York Red Bulls, Everton in the English Premier League and Millwall, also in England.
He joins Melbourne City after leaving CSL side Hangzhou Greentown in July.
Neither Melbourne City nor Gallop has revealed the exact price paid for the midfielder.
"Without putting a precise figure on it, I think it's a significant investment by the game, the biggest investment that the league has ever made in a player and that is, I think, appropriate for Tim Cahill," Gallop added.
"As I say, he's number one on our wish list and we've got him."
(Reporting by Colin Packham; Editing by Greg Stutchbury/Sudipto Ganguly)
