The 25-year-old was reported by match officials for a suspect bowling action during Sri Lanka's loss in the opening test in Galle but was allowed to carry on playing till the results of his test was known.
His bowling action will be examined at the National Cricket Centre in Brisbane on Friday, the same day the hosts begin the dead rubber against England, Sri Lanka Cricket said in a statement.
"In place of Akila Dananjaya, the selectors have included spinner Nishan Peiris into the Sri Lanka test Squad to face England in the third test match," the SLC said in a statement.
Peiris, 21, bowls off-spin and is yet to play for the island country in any of the three formats.
Dananjaya's bowling action had to be tested within two weeks of the match referee's report from Galle.
The off-spinner picked up eight wickets in the Pallekele test, including career-best figures of 6-115 in the second innings as England won the match to take an unassailable 2-0 lead in the three-match series.
(Reporting by Sudipto Ganguly in Mumbai; editing by Amlan Chakraborty)
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