CSIRO said the focus of the institute is to create a "world where all systems behave ethically", and will be explored through research, practice, policy advocacy, public awareness and training in ethical development and use of AI.
Gradient Institute will create open source ethical AI tools that can be used by business and government, coming from their research findings.
Bill Simpson-Young, CEO of the Gradient Institute (formerly director of engineering and design at Data61), said AI poses significant challenges and it is important to discover design choices for AI to lead to positive outcomes for people and society.
"Artificial intelligence learns from data and data reflects the past – at the Gradient Institute we want the future to be better than the past," Simpson-Young said.
"By embedding ethics into AI, we believe we will be able to choose ways to avoid the mistakes of the past by creating better outcomes through ethically-aware machine learning.
"For example, in recruitment when automated systems use historical data to guide decision making they can bias against subgroups who have historically been underrepresented in certain occupations."
Data61 CEO Adrian Turner said the institute was an important step as AI and machine learning starts to impact society and every industrial sector.
"As AI becomes more widely adopted, it's critical to ensure technologies are developed with ethical considerations in mind," Turner said.
"We need to get this right as a country, to reap the benefits of AI from productivity gains to new-to-the-world value. We are pleased to be a founding partner of Gradient Institute, which combines some of the country's greatest minds in AI."
According to University of Sydney deputy vice chancellor Professor Duncan Ivison, there is a great need to "build an ethical framework for AI that combined deep knowledge of the technological possibilities and limits of artificial intelligence, but also ensured it was primarily shaped by human needs and interests".
"Research intensive universities like the University of Sydney – who are able to draw on their deep intellectual resources across the sciences, engineering, humanities and social sciences – are well placed to work collaboratively with government, industry and community groups to achieve this approach," Professor Ivison said.
"We need to collaborate, critique each other and engage the community to tackle what is emerging as one of the great ethical challenges of our time."