An independent review of Defence has found a proliferation of institutionalised waste, delayed decisions and flawed execution.
"This review proposes a transformational change," Defence Minister Kevin Andrews told reporters in Canberra on Wednesday as he released the First Principles review.
The review, a coalition election promise, was undertaken by an independent panel headed up by former Rio Tinto boss David Peever.
Mr Andrews said some 1000 civilian jobs could go from a department of about 19,000 personnel.
The review recommended that if military personnel were performing public service-like jobs there should be a clear case made out for why they're doing that rather than just a default position, he said.
The government has delayed a decision on a recommendation to merge the Defence Science and Technology Organisation into a new departmental group, but accepted the need for the Defence Materiel Organisation to be absorbed into a new capability and acquisitions entity.
Mr Peever said the current structure of the department needed fixing.
"The biggest issue we found at the highest level was Defence ... operates as a loose federation where the parts are not well joined up," he said.
As a result Defence was not a good fit for the purpose of meeting a challenging agenda.
The government has accepted 75 of the review's 76 recommendations which will be implemented over two years.
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