The five dollar note is the only one currently featuring the effigy of a British monarch in Australia.
The Reserve Bank of Australia said Indigenous people will be consulted on a new design that "honours the culture and history of early Australians".
Designing and printing the new banknote will take "a number of years", she said.
Banknotes bearing the likeness of the late Queen already in circulation will continue to be legal tender.
The death of Queen Elizabeth on September 8 was marked by a day of national mourning in Australia, a member country of the Commonwealth whose official head of state is King Charles III, represented by a governor general.
But some indigenous groups denounced the destructive consequences of British colonization, calling for the abolition of the monarchy.
The central bank has said its decision is backed by the centre-left Labor government of Prime Minister Anthony Albanese, which favors a possible move towards an Australian republic.
The disappearance of the effigy of the sovereigns was hailed by the Australian Republican Movement (ARM), which pointed out that indigenous peoples predated British colonization by 65,000 years.
"Australia believes in meritocracy and the idea that someone can be on our currency because of their bloodline is irreconcilable, as is the idea that they can be our head of state by birthright. “, said Craig Foster, president of ARM.
“To think that an unelected king should be on our coinage in place of First Nations chiefs and elders and prominent Australians is no longer justifiable in the hour of truth, reconciliation and ultimately peace. formal, cultural and intellectual independence," he added.
© 2023 AFP