Australia Council chief executive Tony Grybowski declared himself"delighted"at the policy reversal,which followed almost two years of pressure from arts groups and high-profile artists.
The decision was a"positive indication of the minister's confidence in the Australia Council and our programs and activities",Mr Grybowski said.
In the shake-up,$61 million over four years will be transferred to the Australia Council,which grants funding to artistic projects,organisations and individual artists based on an independent assessment process.
That includes $32 million already handed back to the council by Arts Minister Mitch Fifield when he took over the portfolio in 2015. The purpose is to boost funding to smaller artistic enterprises.
Senator Fifield said the change was an"important rebalancing"that showed the government was"open to feedback".
One of the first beneficiaries of the new regime will be the Victorian Opera,which will receive a $340,000 annual grant to assist its transition to a major performing arts company,Fairfax Media can reveal.