The government says the move will help Australia cash in on the increasingly lucrative space industry, worth an estimated $400 billion globally.
Prime minister Malcolm Turnbull confirmed the agency would be “small”, though it is not yet clear how much money will be allocated. The government indicated the costing would be included in the 2018 federal Budget.
“I wouldn’t want to talk it down, but it’s not NASA,” Senator Simon Birmingham said, following the announcement.
“It will be an Australian space agency with Australian interests, seeking to generate and drive investment in Australia.”
In July, the Turnbull government announced a review into the Australian space sector.
Chaired by former CSIRO chief Dr Megan Clark, the reference group said its consultation had “overwhelmingly shown the need” for a national bureau based on more than 200 written submissions.
The group will now draft a charter for the agency to define its purpose, and is due to report back in March next year.
Dr Brad Tucker, an astrophysicist at the Australian National University, said the space agency would pay for itself in the long term. Newly discovered technologies can be patented and sold to the rest of the world.
“We can do big things. We can go mine asteroids, we can put humans on other planets, we can go build the next network of laser cryptography where our satellite communications is direct and impenetrable,” he told SBS World News.
He said the agency could help Australia build more of its own satellites and become less reliant on other countries for communication.
“We might find something new … [that] will completely transform the way we do business. And that will be an investment that you can't put into words and numbers,” he said.
“So this isn't just putting rockets into space, this is helping our lives.”
"There's a big role for science. There's a big role for industry. We want to make sure Australia's plays its part in both of those," Mr Birmingham told reporters in Adelaide on Monday.
"The scientific pursuit in space is, in many ways, never-ending, but of course the commercial opportunities have expanded dramatically across defence, across communications, across transportation.
"This is very much a private-sector driven undertaking in so many spaces and that is why we want to make sure Australia is at the forefront of seizing those opportunities and creating jobs and investment here."
Most developed nations already have space agencies.
New Zealand founded its own last year, with the stated purpose of regulating the space industry and encouraging its development.
Australia already has space capabilities. The CSIRO Deep Space facility outside Canberra is one of three sites in the world capable of tracking NASA’s deep space assets.
Earlier this month, the CSIRO-NASA facility tracked the final decent of the Cassini space probe as it hurtled into the atmosphere of Saturn.
- with AAP