The cut in international arrivals will see 4,000 fewer people come to Australia each week.
Australia will halve the number of international arrivals to the country and conduct an inquiry into the hotel quarantine system following the surge in coronavirus cases in Melbourne.
Prime Minister Scott Morrison made the announcement on Friday afternoon after a national cabinet meeting.
The reduction of international arrivals will see 4,000 fewer people come to Australia each week and take effect on Monday.
“The decision that we took to reduce the number of returned travellers to Australia at this time was to ensure that we could put our focus on the resources needed to do the testing and tracing and not have to have resources diverted to other tasks,” Mr Morrison told reporters in Canberra.
All states and territories are expected to charge returning travellers for the cost of their 14-day quarantine.
"Where possible, we will seek to have some sort of national uniformity across those pricings," Mr Morrison said.
While states and territories had called for the federal government to cut international arrivals to reduce stress on their quarantine systems, Australians and permanent residents stranded abroad urged against a change.
The hotel quarantine review will be conducted by Jane Halton, the former head of the federal Department of Health and a current member of the National COVID-19 Coordination Commission.
"She will be undertaking that review working with states and territories and that again is an important step in providing reassurances … and as our country opens up again, with the exception of Victoria, we can make sure we have even greater confidence in those quarantine arrangements as they have been put in place," Mr Morrison said.
A separate inquiry into Victoria's hotel quarantine program is already underway and a report will be delivered by the end of September.
Victoria recorded 288 new coronavirus cases on Friday - the biggest ever daily total recorded by a state in Australia since the pandemic began.
Chief Medical Officer Paul Kelly said it was important to keep quarantine regulations and operations air-tight.
"There have been very few breaches but we have seen, as has been reported in Victoria, a single breach, even if it's low risk can lead to a catastrophic outcome," he said.
"We absolutely need to know that this is working as best as it can and that is the reason why we're supporting that."
Residents in metropolitan Melbourne are subject to stay-at-home orders and can only leave home for essential work, study, exercise or care responsibilities. People are also advised to wear masks in public.
People in Australia must stay at least 1.5 metres away from others. Check your state’s restrictions on gathering limits.
If you are experiencing cold or flu symptoms, stay home and arrange a test by calling your doctor or contact the Coronavirus Health Information Hotline on 1800 020 080.
News and information is available in 63 languages at sbs.com.au/coronavirus