Government-owned shipbuilder ASC will be split into three separate companies - for building new ships and submarines, sustaining the Collins submarine fleet and for running the associated infrastructure and workforce.
Prime Minister Malcolm Turnbull said the changes were needed to ensure ASC was in the best position to help deliver 54 new navy vessels, including 12 submarines and nine Future Frigates.
ASC, previously the Australian Submarine Corporation, was once slated for privatisation, but the government says the company is a national strategic asset which will remain in public ownership.
Mr Turnbull said Australia would spend $195 billion on defence procurement over the next decade.
"That will give us the capability to be safe, but it will also secure our economic future because these industries are at the cutting edge of technology," he told reporters in Canberra on Tuesday.
ASC was founded in 1985 to build Collins submarines.
It changed its name to ASC in 2004, a year after launch of the final Collins. With submarines out of the way, the company was positioning itself for future work constructing three air warfare destroyers.
It hasn't always performed well. Low availablility of Collins subs and AWDs running late and over budget prompted former defence minister David Johnston to declare he wouldn't trust ASC to build a canoe.
The company has substantially improved its performance and in 2014-15 even turned a modest $21.9 million profit.
Finance Minister Matthias Corman said the intention was for the full structural separation of ASC to be completed by the middle of 2017.
Defence Industry Minister Christopher Pyne said it would drive jobs and growth and create high technology jobs.
"The infrastructure will make Australia one of the centres of naval anti-submarine shipbuilding in the world. It will create a new export industry for our country and it is a red letter day for the defence industry," he said.
ASC chairman Bruce Carter said the board had been working closely with the government on the issue and had effectively been operating separate submarine and shipbuilding businesses for the past two years.
"The separation of ASC into three businesses will ensure that the company is best placed to support the future needs of Australia's naval industry," he said in a statement.
