The new ministry will oversee agencies including the Australian Federal Police
The portfolio will be modelled on the UK Home Office.
The Home Affairs ministry, to be headed by current Immigration Minister Peter Dutton, will manage security agencies including police and intelligence.
Mr Turnbull described it as the most significant reform of national security arrangements "in more than 40 years".
"The new portfolio will be similar to the United Kingdom's Home Office arrangement, a federation, if you will, of border and security agencies," he told reporters on Tuesday.
In explaining the distinction, Mr Turnbull said each agency will "retain their current statutory independence".
Adversaries 'agile'The portfolio will oversee major agencies including the Australian Federal Police, the Australian Security Intelligence Organisation and the Australian Border Force.
It will also include:
- a co-ordinating office of national intelligence
- a new cyber security centre to be staffed around the clock
- oversight of the Australian Criminal Intelligence Commission, the Australian Transaction Reports and Analysis Centre and the Office of Transport Security.
"We cannot take an 'if it ain't broke, don't fix it' approach to security arrangements," he said.
"Not least because our adversaries are agile and nimble, constantly adapting and evolving to defeat our defences. We need more enduring and better integrated arrangements."
He said he expects the ministry overhaul will be completed by July next year.
On Monday, Mr Turnbull announced the Australian military would be given broad new powers to respond to domestic terrorist attacks.