In 2006/07 federal budget documents released last night, Attorney-General Philip Ruddock said the measures were announced in response to indications identity theft was being targeted by "organised crime and potential terrorists".
Ruddock said identity theft cost the community around AU$1 billion per year.
The DVS would, he said, allow agencies to check online the validity of key identity documents being presented by individuals applying for high-value benefits and services. They would be able to check passports, the health and welfare services access card, citizenship certificates, birth certificates and drivers licences issued in Australia.
It would be established at a cost of AU$28.3 million, building on a 12-month prototype rollout.
In addition, Ruddock said, three identity fraud "strike teams" led by the Australian Federal Police (AFP) would be established at a cost of AU$19.6 million over four years.
"AFP investigations have revealed the sale of complete identity packages of drivers' licences, Medicare cards, passports and birth certificates," he said. "These offer criminals, including terrorists, multiple means to shield their activities and evade detection and arrest."
The teams would be based in Brisbane, Melbourne and Perth and be based on the Identity Crime Task Force already operating in Sydney.
They will comprise staff from the AFP, Australian Crime Commission, Customs and Immigration.
Ruddock also revealed that a custom-built Case Management and Information System would be deployed in overseas jurisdictions as part of efforts to enhance regional counter-terrorism capabilities.