The Reserve Bank has decided to update the note to feature a new design which "honours the culture and history of the First Australians".
"This new design will replace the portrait of Her Majesty Queen Elizabeth II," the bank said in a statement on Thursday.
"The other side of the $5 banknote will continue to feature the Australian parliament."
It said the decision followed consultation with the government, which supported the change.
Treasurer Jim Chalmers weighed in on the decision, saying the change was an "opportunity to strike a good balance".
"The monarch will still be on the coins, but the $5 note will say more about our history and our heritage and our country, and I see that as a good thing," he told reporters in Melbourne.
Opposition Leader Peter Dutton likened the move to changing the date of Australia Day.
"I know the silent majority don't agree with a lot of the woke nonsense that goes on but we've got to hear more from those people online," he told 2GB Radio on Thursday.
Mr Dutton accused Prime Minister Anthony Albanese of being central to the decision for the king not to appear on the note, urging him to "own up to it".
The bank plans to consult with Indigenous groups in designing the $5 note and expects it to take a number of years to be designed and printed.
The current $5 will continue to be issued until the new design is introduced and will remain legal tender.
The face of King Charles III is expected to be seen on Australian coins later this year.
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