The work is expected to be completed for the Anzac centenary in 2015.
Prime Minister Julia Gillard, in making the announcement on Monday, said the government wanted to ensure the Gallipoli campaign stood the test of time for generations of Australians to come.
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"We want to upgrade this gallery, so visiting Australians can say, with full appreciation and gratitude - we will remember them," she said.
Veterans Affairs Minister Warren Snowdon said the refurbished exhibition would be a fitting tribute to the 400,000 Australians who served in World War I and the more than 60,000 who died.
"The upgrade will also introduce new technologies to the galleries providing new ways to illustrate the courageous battles our soldiers fought."
