Australian authorities had said following the queen's death that the image of King Charles III would not automatically replace her on A$5 notes.
They said then she might be replaced by Australian figures.
The decision to instead honor the nation's indigenous culture follows consultation with the federal government, which supports the change, the Reserve Bank of Australia said in a statement.
The other side of the note will continue to feature the Australian Parliament, it said.
Peter Dutton, leader of the main opposition Liberal Party, said the central bank's decision was politically motivated.
"There's no question about this, that it's directed by the government and I think the Prime Minister should own up to it," he said on local radio station 2GB.
Queen Elizabeth's death last year has reignited debate in Australia about its future as a constitutional monarchy. Voters narrowly chose to maintain the British monarch as its head of state in a 1999 referendum.
Prime Minister Anthony Albanese is a long-standing republican, but had said after the death of the queen in September it was "not a time" for a debate on the role of the monarchy in Australia.
The replacement decision also comes as Australia's center - left Labor government pushes for a referendum, required to alter the constitution, to recognize Indigenous people in the document and require consultation with them on decisions that affect their lives.
"This is a massive win for the grassroots, First Nations people who have been fighting to decolonize this country," tweeted Lidia Thorpe, an opposition Green Party lawmaker of Indigenous descent.
The A$5 banknote is the only Australian banknote to carry the image of the Queen. Australian coins are mandated to carry the image of the British monarch and new coins will have the effigy of King Charles.
King Charles is the head of state in Australia, New Zealand and 12 other Commonwealth realms outside the United Kingdom, although the role is largely ceremonial.