Terrorist group supporters are using legitimate businesses or charities to disguise funds being channelled to extremists in Iraq and Syria.
Prime Minister Tony Abbott on Thursday unveiled a $20 million boost to Austrac - part of the government's $630 million counter-terrorism package - to improve detection and disruption of terrorism financing.
"Anyone who chooses to support terrorists is playing a direct part in the atrocious and violent acts they commit and is putting Australian lives at risk," Mr Abbott said in a statement.
A new report, Terrorism Financing in Australia, shows the practice is relatively uncommon but still poses a threat to national security.
Supporters of extremist activity in Syria and Iraq, which pose the greatest terrorism financing risks to Australia, are disguising funds collected by mixing them with legitimate business or fundraising activities.
The extra government money will allow the Australian Transaction Reports and Analysis Centre to hire more analysts and improve intelligence systems.
The Austrac report, which does not put a figure on the money being channelled overseas, said Syria posed the greatest risk in terms of terrorism financing.
At least two groups listed as terrorist organisations in Australia - Jabhat al-Nusra and the Islamic State - are involved in the Syrian conflict.
Austrac says terrorist groups in Syria have links with radicalised Australians.
"The large volume of humanitarian aid and financial assistance sent from Australia to family and community members in Syria provides opportunities for commingling or disguising funds for terrorism financing among the legitimate transactions," the report said.
Neighbouring countries including Lebanon, Turkey, the United Arab Emirates and Jordan had been used as conduits to route money destined for terrorist groups in Syria.
This is because funds sent to these countries are less likely to attract attention than those sent directly to Syria.
Some cash is also being physically couriered into the conduit countries from Australia and carried overland across the border into Syria.
The report said charities could be misused for terrorism financing, but only a handful had been involved in cases to come before the courts.
Austrac has warned banks to step up scrutiny of funds sent to Syria and nearby countries such as Yemen and Somalia.
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