The changes would be aimed at making sure nobody could be charged with war crimes for bombing I-S people not directly involved in fighting.
Current rules of engagement would be eased to let Australian aircraft pursue a wider range of I-S targets, including logistics bases and not just those directly participating in combat.
Prime Minister Malcolm Turnbull says, under the current legislation, some Australian Defence Force people could potentially find themselves liable to prosecution.
Mr Turnbull says the changes will protect Australian soldiers and strengthen the fight against IS, also known as Daesh.
"Under international law, all members of an organised armed group such as Daesh can be targeted with lethal force, subject, of course, to the ordinary rules of international humanitarian law. This is a reasonable and conventional approach adopted by the armed forces of our key allies across the world. But there is a legal argument that Australia's domestic law is more restrictive than international law. This legal risk posed a major challenge to the effectiveness of our operations."
Australian Defence Force Chief Mark Binskin says there is a need to address the difference between the international and domestic laws in the rules of engagement.
Air Chief Marshal Binskin says military people fear they could be charged with a war crime under the current laws.
He says those laws mean Australian forces can only target Daesh fighters taking a direct and active part in hostilities.
"It doesn't allow us to target those important supporting elements that are key to their fighting ability, e.g., their logistics and support organisations. And, therefore, we've not been able to maximise the combat capability of our deployed forces. The ambiguity that we've discovered and that's created by this situation is a concern because, on operations now, we're asking people to make split-second decisions in a very dynamic organisation and there is a condition that exists where a domestic court may take a narrower interpretation of Australia's obligations under international law."
The Government also plans to bring to parliament later in September new draft laws to keep high-risk terrorists in jail after their sentences end and a stronger control-order regime.
Mr Turnbull says those moves are a necessary strengthening of Australia's counter-terrorism laws.
He says security efforts in Australia must be stepped up with around 200 people currently being investigated for providing support to individuals and groups in the Syria-Iraq conflict.
"In many cases, Daesh is deliberately and directly sending operatives to other countries to undertake attacks. In others, it is acting opportunistically by recruiting, radicalising and enabling individuals who are already in-country and have had no prior history with terrorist organisations. Some of these lone actors and small groups are not deeply engaged with the Islamist ideology but are, nonetheless, due to a range of reasons, including mental illness, susceptible to being radicalised rapidly."
Opposition Leader Bill Shorten says the changes proposed to the parliament are important.
He says he wants to see the details of the legislation but the Opposition will always work in cooperation with the Government concerning national security at home and abroad.
"The loss of innocent lives to terrorism has become an all too familiar story on the evening news. The toll grows across the world, on every continent, in nations of all faiths. And I would say to the Prime Minister and to all Australians that the cooperative, bipartisan approach that Labor took to questions of national security in the 44th Parliament will continue in the 45th Parliament."
Legislation imposing harsher penalties for trafficking illegal firearms will also go to parliament in the next sitting week.
