Fully vaccinated positive cases will be able to leave isolation after seven days of taking the test but will need to return a negative rapid antigen test on day six.
This will be 10 days in South Australia.
Close contacts will only need a rapid antigen test and will be able to leave isolation after seven days if they return a negative rapid antigen test on day six.
Positive rapid tests will need to be confirmed by a PCR test.
State and territory leaders agreed the common definition of a close contact will only cover household or intimate contacts who spent more than four hours with a positive case at an emergency national cabinet meeting on Thursday.
Symptomatic close contacts will still need to take a PCR test.
Prime Minister Scott Morrison said the changes reflected "a practical way forward" and recognised the different situations different states faced.
Five jurisdictions - NSW, Victoria, Queensland, South Australia and the ACT - will move to adopt the new definition from Friday.
Tasmania will join from January 1 and the Northern Territory and Western Australia will make announcements in the coming days.
"What this does is significantly changes those who need to be going and (lining up) in testing queues," Mr Morrison said.
State testing centres will also hand out rapid antigen tests over the coming weeks for people who fulfil the new testing requirements.
"If you turn up at those testing centres for (those) reasons I have set you will either get a rapid antigen test or a PCR test," Mr Morrison said.
Tests will not be provided for free across the board, the prime minister says.
"Rapid antigen tests will be provided publicly at those testing centres for those who require one according to the rules," he said.
"For all other casual uses, that is what the private market is for."
States will also look at exceptions to the more narrow scope in high-risk settings and vulnerable communities.
"We might flex up the definition of close contacts in a residential aged care facility because we know people there are far more vulnerable, or if we know there have been a large number of new cases or community transmission within an individual workplace," SA Premier Steven Marshall said.
International arrivals in NSW will only need to take a rapid antigen test instead of a PCR test, a move which will help alleviate pressure on testing clinics with 5000 flying into Sydney every day, Premier Dominic Perrottet said.
"It is a more balanced approach and an approach that suits the circumstances at the time," he told 2GB.
The Royal College of Pathologists of Australasia said testing labs were running at capacity and staff were working under significant pressure with increased demand for PCR testing.
States have also continued to report record case numbers.
Some 12,226 new cases were reported in NSW on Thursday, up from 11,201 on Wednesday, while in Victoria case numbers jumped to 5137 from 3767 the day before.
Victoria reported 13 deaths while NSW reported one.
There were also 2222 cases in Queensland, 92 cases in Tasmania, and 253 in the ACT.
There were 1374 cases in South Australia and the death of a COVID-19 positive child under the age of two. The child's death is being investigated by the coroner.
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