The investment is to be spent over a decade to transform a shipbuilding and maintenance precinct in Perth, Western Australia, Defence Minister Richard Marles said.
The government is ploughing money into Perth's Henderson Defence Precinct after signing the 2021 AUKUS pact with Britain and the United States to arm its navy with nuclear-powered submarines.
The shipyard development is part of a major military restructure to improve Australia's long-range strike capabilities in the face of China's expanding military strength across the Pacific.
Australia, which has no infrastructure to service nuclear-powered submarines, aims to acquire at least three US Virginia-class submarines within 15 years and eventually to manufacture its own subs.
"Henderson is very much an AUKUS project. It is where we will do sustainment and maintenance of our future submarines," Marles told a news conference.
"I have got no doubt this decision will be welcomed in the United States, as it will be welcomed in the United Kingdom, because it is another step down the AUKUS path," the minister said.
But the decision was based on Australia's own assessment of the "strategic landscape" it faces and the defence force it needs "to meet that moment", he said.
The investment will help equip Henderson with high-security dry docks to maintain nuclear-powered submarines, as well as facilities to build landing craft and eventually Japanese Mogami-class frigates, Marles said.
The United States is also expected to use the shipyard for maintenance of its own nuclear-powered submarines.
Total costs to develop the Henderson Defence Precinct could eventually reach an estimated Aus$25 billion, the minister said.
- 'Positivity' on defence pact -
The shipyard expansion is the latest in a string of high-profile Australian defence upgrades.
Australia announced in August it would equip its navy with 11 Mogami-class frigates built by Japan's Mitsubishi Heavy Industries.
Australia will pay Aus$10 billion over the next 10 years to acquire the stealth frigates as it aims to expand its fleet of major warships from 11 to 26 over the next decade.
The first three Mogami-class frigates will be built overseas, but Australia hopes to produce the rest in Western Australia.
Last week, the Australian government said it would deploy a Aus$1.7 billion fleet of "Ghost Shark" underwater attack drones, with the first expected to enter service in January.
Questions have been raised about the AUKUS submarine programme, which lies at the heart of Australia's defence strategy and could cost up to US$235 billion over 30 years, according to government forecasts.
US President Donald Trump's administration has put AUKUS under review to ensure it aligns with his "America First agenda", with some critics saying the United States does not produce enough nuclear-powered submarines to supply Australia as well as its own navy.
But Canberra is confident in the pact's future.
The Washington Post said US Secretary of State Marco Rubio had privately reassured Marles two weeks ago that AUKUS would proceed.
Marles declined to discuss the report.
But he told Australian public broadcaster ABC that in all his discussions with the Trump administration "there has been an enormous sense of positivity about the role that AUKUS can play for the United States".
The government said it had made additional defence spending commitments since May 2022 amounting to Aus$70 billion over the next decade, after including the latest shipyard investment.
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