The new unit, which comes the same week a second global ransomware attack (Petya) started, will also be tasked with preparing to launch its own assaults on foreign forces.
"The recent WannaCry and Petya ransomware attacks have affected governments, businesses and individuals around the world," said Prime Minister Malcolm Turnbull.
"Our response to criminal cyber threats should not just be defensive. We must take the fight to the criminals."
Minister assisting the Prime Minister on Cyber Security Dan Tehan said the new unit will have various responsibilities and will integrate with existing operations across defence.
"The division will have the responsibility for military cyber operations, military intelligence, joint electronic warfare, information operations and our military's space operations," said Minister Tehan.
"It will integrate existing operations from across our defence forces to protect and support our ADF deployed personnel and systems."
Part of the $400 million set aside in last year's Defence White Paper will be used to hire cyber specialists.
It is understood the new unit will initially have 100 personnel and is anticipated to grow to around 900 over the next decade.
PM Turnbull highlighted the threat of cyber crime, noting the cost to the economy is at least $1 billion per year.
"Cyber crime is conservatively estimated to cost the Australian economy $1 billion a year," the Prime Minister said.
"Since its inception at the end of 2014, there have been over 114,000 reports of cyber crime registered with the Australian Cybercrime Online Reporting Network (ACORN).
"Notably, 23,700 of these have been reported over the last six months, highlighting a growing occurrence of cyber criminal activity."
The Prime Minister said the Australian Signals Directorate (ASD) has also been instructed to use its offensive capabilities against cyber criminals.
"Given the growing cost of cyber crime to the Australian economy, the government has directed the Australian Signals Directorate to use its offensive cyber capabilities to disrupt, degrade, deny and deter organised offshore cyber criminals. This follows the government’s public acknowledgement of ASD’s offensive cyber capability when we launched Australia’s Cyber Security Strategy in April 2016," he said.
"The use of this capability, which is currently used to help target, disrupt and defeat terrorist organisations such as Daesh, is subject to stringent legal oversight and consistent with our obligations under international law.
"The use of offensive cyber capabilities will add to the government’s crime-fighting arsenal and form part of our broader strategy to prevent and shut-down safe-havens for offshore cyber criminals."