The government said in a statement that state and territory police forces remained the best first response, but the military could offer additional support to enhance their capabilities.
Australia has seen a series of 'lone wolf' Islamist-inspired attacks, prompting a review of police tactics and the powers of state and federal authorities.
'The key thing we need is the most flexible possible arrangements acirc;euro;" the threat's changed very significantly,' Justice Minister Michael Keenan told the Australian Broadcasting Corporation on Monday.
Under the proposed law changes, state and territory governments would be able to call for military aid before the ability to respond to an incident exceeds the capabilities of their police forces.
'What we want to do is make sure we're working with the police, so whatever assets the Commonwealth has including the ADF [Australian Defence Force] are being used,' Keenan said.
The proposed law changes are a result of the first review of the military's role in domestic counter-terrorism since 2005, the government said.