The country’s six super hornets will head home from the Middle East, marking the end of Australia’s airstrike operations.
Payne said the decision follows discussions with the Iraqi government and other allies.
“I want to particularly acknowledge the phenomenal efforts of the hornet and super hornet pilots and support crew over the last three years,” she told reporters at RAAF Base Glenbrook on Friday.
Despite the hornet air personnel returning home in the new year she insisted it was not the end of Australia’s contribution in Iraq.
The wedgetail surveillance and refueling aircraft will continue to support operations, as well as the 80-strong Special Operations Task Group.
Earlier this month Iraq’s prime minister declared victory over the terrorist group.
Labor’s former defence spokesman Stephen Conroy described the announcement as great news.
“I remember being in the room in the briefings when Isis first starting rolling through all those towns in Iraq and there was enormous pessimism that Iraq would never come together,” he told Sky News.
“The troops over there have done a fantastic job and this is a real tribute to their professionalism.”