A national commissioner will be appointed to turn around the over-representation of Aboriginal and Torres Strait Islander children in out-of-home care and youth detention.
The National Commission for Aboriginal and Torres Strait Islander Children and Young People will begin operations in January.
A First Nations person will be appointed to lead the body, charged with protecting and promoting the rights of Indigenous children and young people across a range of issues.
"It has taken some time to get to this point but we have to get this role right," said Catherine Liddle, chief executive of the Indigenous children's peak body SNAICC and chair of the federal government's Safe and Supported Aboriginal and Torres Strait Islander Leadership Group.
"Our children deserve it."
Aboriginal and Torres Strait Islander children are almost 11 times more likely to be in out-of-home care than non-Indigenous young people and 29 times more likely to be in youth detention.
Indigenous Australians Minister Malarndirri McCarthy said the rates of over-representation in both systems were unacceptable.
"The national commissioner will focus on working with First Nations people and organisations on evidence-based programs and policies to turn those figures around," she said.
"The national commissioner will be informed by the experiences of Aboriginal and Torres Strait Islander children and young people, whose voices deserve to be heard.
"Their strengths, sense of hope and new ideas will drive systemic change."
Social Services Minister Amanda Rishworth said the establishment of the new commission was a "historic milestone".
"The national commissioner will work with Aboriginal and Torres Strait Islander people, communities, commissioners, guardians, advocates, and other stakeholders to provide expert advice," she said.
Their focus will be on "the development and delivery of policies, programs and services to ensure they meet the needs of Aboriginal and Torres Strait Islander children and young people".
