Deputy Prime Minister Richard Marles thanked the Vietnamese government for its action.
"They've done this on the basis of humanitarian grounds and in the spirit of friendship, which exists between Australia and Vietnam," Mr Marles told reporters on Tuesday.
"This is a result of careful advocacy which has been undertaken by the Australian government with the Vietnamese government over a number of months now."
The retired Sydney baker was arrested in 2019 on terrorism charges and sentenced to 12 years in prison over his membership of the overseas, pro-democracy political party Viet Tan.
Mr Kham's wife and two children thanked the government for securing his release.
They also thanked their legal team and many organisations involved.
"We share this happy news that Chau Van Kham is well and has returned to his family today," his family said in a statement.
Human Rights Watch's Asia director Elaine Pearson said while the release was fantastic news, more than 150 political prisoners remained in detention in Vietnam for peaceful acts of free expression.
Among those still in jail were journalist Pham Doan Trang and environmental activists Mai Phan Loi, Dang Dinh Bach and Hoang Thi Minh Hong.
"The one-party state has no tolerance for anyone who expresses a narrative contrary to the government and the Australian government should continue to call on Vietnamese authorities to release all political prisoners," Ms Pearson said.
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