The umbrella ministry will focus on national security and be headed by Cabinet minister Peter Dutton.
But some experts are questioning the need for the change and raising concerns over the concentration of power.
Prime Minister Malcolm Turnbull says it is the biggest overhaul of Australia's national-security arrangements in more than 40 years.
The new department of Home Affairs will be responsible for everything from border security to counterterrorism.
It is a major promotion for Immigration Minister Peter Dutton, who will also oversee the operations of ASIO and the federal police.
"Having made the promise to stop the boats and to make sure that we can keep our borders secure, we make this announcement today with this promise: The Home Affairs portfolio is dedicated to keeping Australians safe, to doing everything that we can to defeat the scourge of terrorism."
The Government says the new department will be modelled after the Home Office in Britain.
Malcolm Turnbull says the change will simplify national security, with every agency reporting to the same minister.
"We need these reforms, not because the system is broken but because our security environment is evolving quickly, it's becoming more complex."
The change means Justice Minister Michael Keenan will no longer oversee the federal police.
And the Attorney-General's Department will lose responsibility for ASIO.
But Attorney-General George Brandis will be in charge of keeping the agencies in check, with new oversight powers.
Senator Brandis says the reform will let him focus on his legal roles, like the issuing of warrants, while giving national security the full attention of a senior minister.
"What that means is that, much though my focus has been on national security, it has not been able to be an exclusive focus."
Labor usually offers bipartisan support on national-security matters.
But Opposition Leader Bill Shorten says he wants to hear more expert opinion, accusing Mr Turnbull of political motivations.
"I'll believe this is a good idea when the people who keep us safe every day tell us it's a good idea. This idea has been kicked around before in different forms over many years, and many different Western nations have had some of these same debates. Quite often, these sort of reforms end in tears. My concern is, even before we get to the substance or the merit of the idea, this seems to be about a power grab by one minister, Mr Dutton, in the Government."
The Prime Minister denies that.
He says it is about practicality, not politics.
"It is not about politics, it's about safety, Australians' public safety. And the arrangements that I've announced are ones that are logical, they're rational, they make operational sense, and they will enable Peter Dutton as the minister (for Home Affairs) to be able to have the responsibility for those key agencies that are defending, preserving, protecting our national security at home."
Deakin University analyst on global Islamic politics Greg Barton says there are risks inherent in giving one department too much power.
And says that is why previous reviews of the country's security agencies have decided not to go ahead with a super-ministry.
"The idea of a super-ministry has been visited in the past several times over, and, each time, it's been decided that, on balance, the benefits, potential benefits, are outweighed by the potential risk."
The Government says the changes will be phased in slowly, with the new Dutton ministry fully operational by the end of June next year.
