The new system, which has been approved by cabinet and the national security committee, will be announced by Prime Minister Malcolm Turnbull and Defence Minister Marise Payne during a visit to Sydney's Holsworthy Barracks on Monday.

State police will remain the first responders to a domestic terror incident, but will no longer retain sole command of an attack or hostage situation. The military will also be allowed on the streets to support the wider police response, including blocking potential suspects from leaving the scene. Elite special forces would have full legal authority to shoot and kill terrorists. 

The fallout from the deadly 2014 Lindt cafe siege in Sydney triggered a year-long review of the so-called callout provisions of the Defence Act amid fears the legislation contained so many legal and administrative barriers it would hinder any swift military response to a terrorist assault in Australia.

It was the first major review of Defence's contribution to domestic counter-terrorism in more than a decade.

"We cannot afford to take a 'set and forget' mentality on national security," Mr Turnbull said. "We must constantly review and update our responses to the threat of terrorism."

Other changes will see army commandos train select state and territory police teams, while Defence will also offer to permanently embed officers within state law enforcement agencies to act as liaisons and advisers. 

The Australian Defence Force has two tactical assault groups - one in Sydney and one in Perth - on standby to rapidly deploy to a terrorist attack. 

While Defence was prepared to intervene in the Sydney siege and even built a mock-up of the Lindt cafe at the Holsworthy Barracks, it was never asked to get involved. The coroner overseeing the Lindt cafe inquiry found the ADF did not need to be deployed because the complex callout criteria had not been met and NSW Police largely had the situation in hand.

But the coroner did note the "challenge global terrorism poses for state police forces calls into question the adequacy of existing arrangements".

Under the current system, the ADF can only be deployed if state or territory police believe their capability or capacity to respond has been exceeded. That provision will be abolished under the Turnbull government's changes, meaning states could request federal help even if they retained control of the situation.

Under extraordinary circumstances, the Commonwealth would not need to wait for an invitation and could make the decision to deploy the ADF. 

The system also only allows the ADF to be deployed if the governor-general signs off on a request from the prime minister, attorney-general and defence minister, who all have to agree state forces are incapable of properly responding. 

Mr Turnbull said state and territory police remain the best first responders "immediately after an attack starts".

"But Defence can offer more support ... to enhance their capabilities and increase their understanding of Defence's unique capabilities to ensure a comprehensive response to potential terrorist attacks," he said.

The changes, which need to pass Parliament, will be discussed at the next Council of Australian Governments meeting.

Mr Turnbull said the new system would better support states in preparing for terrorist incidents and improve information flows between the ADF and police during an incident. 

Former SAS commander-turned federal MP Andrew Hastie has previously said the Sydney siege response demonstrated state police were "not up to the task" of dealing with the unique nature of Islamist terrorism.

"The most lethal means of statecraft resides with the ADF," Mr Hastie said.

"Contain and negotiating, which was the approach in the Lindt cafe siege, isn't going to work [in dealing with Islamist terrorists]."

Australia's terror threat level remains at "probable", meaning the government has credible intelligence indicating individuals or groups have the intent and capability to conduct a terrorist attack.