Yarra City councillors voted unanimously on Tuesday night to move its traditional citizenship and citizen-of-the-year award ceremonies from January 26 to another date out of respect for Aboriginal and Torres Strait Islander people.
It will also cease to refer to January 26 as Australia Day and officially join the change-the-date campaign in its publications and social media.
The move by the Greens-dominated council angered Canberra, which on Wednesday stripped the power of Yarra Council officers to hold a citizenship ceremony at any time of the year.
Yarra Mayor Amanda Stone says the council does not believe it is in breach of the citizenship ceremonies code and is seeking a meeting with the government.
"We are working through the implications of the (minister's) announcement," she said in a statement on Wednesday night.
"We will be seeking to discuss this matter with the Assistant Minister as soon as possible."
Assistant Minister for Immigration and Border Protection Alex Hawke said the government was "committed to ensuring that citizenship is treated in the 'non-commercial, apolitical, bipartisan and secular manner' which the code mandates."
Prime Minister Malcolm Turnbull said the council's decision to change the way it commemorates the day was "utterly out of step" with Australian values.
"On Australia Day, we recognise the greatness of our achievement as Australians," Mr Turnbull said in parliament on Wednesday.
"To change the date would be to turn our back on Australian values".
Prospective citizens within the City of Yarra will now have to go to ceremonies held by neighbouring councils while the Department of Immigration and Border Protection will hold events within the city as required, including on Australia Day 2018.
Council argued community sentiment was largely in favour of the change across a community in Melbourne's inner east that includes some of the city's most valuable real estate, public housing and suburbs with working-class roots.