A meeting of the Council of Australian Governments agreed on setting up the national database, along with several other measures deemed to be improvements on the existing security arrangements.
In a statement, the COAG said that agreement had been reached to "share and match identity information, with robust privacy safeguards, to prevent identity crime and promote law enforcement, national security, road safety, community safety and service delivery outcomes".
The face matching services will include face verification service, face identification service, one person one licence service and a facial recognition analysis utility service.
The services will be used for preventing identity crime, general law enforcement, national security, protective security, community safety, road safety and identity verification.
Prime Minister Malcolm Turnbull said the new arrangement was an updating of the existing process to meet current needs.
"This is not accessing information, photo ID information that is not currently available. We are talking about bringing together essentially federal government photo IDs, passports, visas and so forth, together with driver's licences," he said.