The decision follows consultation with the federal government, which supports the change, the Reserve Bank of Australia said in a statement on Thursday.
The other side of the note will continue to feature the Australian Parliament, it said.
Elizabeth's death in September last year, aged 96, has reignited debates 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.
King Charles III, who became British monarch after his mother's death, is the head of state in Australia, New Zealand and 12 other Commonwealth realms outside the United Kingdom, although the role is largely ceremonial.
Australia in September last year said the image of Charles would not automatically replace Elizabeth on $5 notes, and that she might be replaced by Australian figures.
Authorities have said the decision to include the Queen's image on the $5 dollar note was about her personality as opposed to her status as the monarch.
The decision to update the note comes as Australia's centre-left Labor government pushes for a referendum, required to alter the constitution, to recognise Indigenous people in the document and require consultation with them on decisions that affect their lives.
In 2021, Australia officially amended its national anthem to remove reference to the country being "young and free" amid calls to recognise that its Indigenous people are the oldest civilization in the world.
The Reserve Bank said it would consult with Indigenous groups in designing the A$5 banknote.
It will take a number of years to design and print the new banknote. Until then, the current note will continue to be issued.
