The ministers signed the Australia-Indonesia Defence Cooperation Arrangement while at a meeting in Perth.
Minister Pyne said the arrangement reaffirms the strength of Australia's longstanding relationship and its intent to deepen engagement with Indonesia in future decades.
"This updated arrangement demonstrates our commitment to enhancing defence co-operation on shared security challenges into the future," the minister said in a statement to media.
"Our bilateral defence relationship is built on mutual respect for each other’s sovereignty and territorial integrity, which is underpinned by the Lombok Treaty. Reaffirming and strengthening our defence co-operation will enable us to continue to address our shared strategic interests and counter mutual security threats, including maritime security and terrorism."
The signing occurred in the margins of the inaugural Sub-Regional Defence Ministers’ Meeting on Counter-Terrorism in Perth. The meeting is a new forum bringing together ministers from Australia, Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand.
Minister Payne said in the wake of the recent success against Daesh in the Middle East, Australia and its neighbours must now work to guard south-east Asia from terrorism.
"As we have seen in recent operations against Daesh in the Philippines, defence forces play a vital role in working with law enforcement agencies to disrupt terrorist groups from operating freely in our region," Minister Payne said.
"Together we will discuss the threat Daesh and other terrorist groups pose to regional security and explore practical measures to enhance regional counter-terrorism co-operation.
"This new forum will enhance our ability to respond to these challenges together, to prevent terrorist groups from gaining a foothold in our region. Terrorism in our region is a collective challenge that requires a collective response."