The pact, announced this month, was signed during Australian Defence Minister Richard Marles' visit to Indonesia this week and includes provisions for joint drills and deployments to each country.
The two countries have sought to boost security ties in the face of increased flashpoints in the region including the South China Sea, where several states claim sovereignty over disputed islands and waterways.
Indonesia's defence minister Prabowo Subianto described the Australia-Indonesia Defence Cooperation Agreement as a "historic milestone".
"(The deal) was carried out together to... increase cooperation to help each other overcome various security threats and promote sustainable peace and stability in the Asia-Pacific region," he told a joint news conference Thursday.
Prabowo emphasized that the agreement was not a military pact or military alliance, adding that he hoped to forge stronger ties with Australia in the future.
Marles said the pact was the most significant defence agreement between the two countries, hailing it as a "treaty-level agreement".
"We will see a much greater interoperability between our defence forces, an ability to operate from each other's countries," Marles said.
The pact was first unveiled when president-elect Prabowo, who is set to succeed President Joko Widodo in October, visited Canberra last week.
The two countries are due to hold a joint military exercise in East Java in November, involving almost 2,000 military personnel.
The exercise, which will involve air, land, sea and cyber exercises, will be "the biggest exercise that Australia will do outside of our nation this year," Marles said.
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