The new agency, which will have ongoing funding starting at $26 million over the next four years, will commence operations on 1 July this year and will be led by former CSIRO boss Dr Megan Clark, who led the expert review group of Australia's space industry.
The global space economy is worth around US$345 billion, and growing at nearly 10 per cent a year, yet Australia only accounts for 0.8 per cent.
The new investment into the industry has been tipped as having the potential to create 20,000 jobs.
Minister for Jobs and Innovation Michaelia Cash said the global space industry was growing rapidly and it was crucial that Australia was part of this growth.
"Space technologies are not just about taking people to the moon, they open up opportunities for many industries, including communications, agriculture, mining, oil and gas," Minister Cash said.
"An Australian space agency will support the long-term development of space technologies, grow our domestic space industry and secure our place in the global space economy."
The investment from the government has been welcomed by Australia's burgeoning defence industry, from primes and SMEs alike.
Michael Ward, managing director of Raytheon Australia, said the investment in the industry will help develop Australia's innovation across multiple industries.
"Raytheon Australia has a strong culture of Australian innovation, which is why I welcome the Turnbull government’s announcement that it will establish the Australian Space Agency," Ward said.
"Investment in a domestic space industry will encourage more home-grown enterprise and innovation and will help to create world-leading employment opportunities for Australians.
"I congratulate Dr Megan Clark AC, former head of CSIRO, on her appointment to lead the agency. Dr Clark is a pre-eminent member of the science community and universally respected by industry and academia."
Professional services provider Nova Systems also praised the announcement, congratulating Dr Megan Clark on her efforts to grow the industry and nurture the space industry, which will enable jobs in this fast-growing business sector and support development of sovereign capabilities that can benefit defence, homeland security and other markets.
"Nova acknowledges the excellent work of the Expert Review Group and their report and urges support of the recommendations of their recently delivered report," chairman of the Nova Group Jim Whalley said.
"We congratulate Dr Megan Clark, head of the Expert Review Group, on a very high-quality report, and on being named as the first head of the Australian Space Agency. Her leadership will be profoundly influential in getting the agency off on a good start."
The new agency will focus on international partnerships and industry seed funding.
“It will be good to see Australia take its place at the table in the global space community," Whalley added.