Foreign Minister Penny Wong announced the sanctions in a joint statement alongside her counterparts representing the governments of Canada, New Zealand, Norway and the United Kingdom.
"(National Security Minister) Itamar Ben-Gvir and (Finance Minister) Bezalel Smotrich have incited extremist violence and serious abuses of Palestinian human rights," the joint statement said.
"Extremist rhetoric advocating the forced displacement of Palestinians and the creation of new Israeli settlements is appalling and dangerous.
"These actions are not acceptable."
Mr Ben-Gvir, from the Jewish Power party, and Mr Smotrich, of the Religious Zionism Party, are members of Israeli Prime Minister Benjamin Netanyahu's coalition government.
Senator Wong said Australia "will continue to work with the Israeli government and a range of partners" to help establish peace in the region.
Israeli Foreign Minister Gideon Saar called the sanctions "outrageous" and said his government would hold a meeting early next week to decide how to respond to the "unacceptable decision" made by the five countries.
The sanctions relate to the West Bank but the joint statement on Wednesday morning also said "this cannot be seen in isolation from the catastrophe in Gaza".
"The measures announced today do not deviate from our unwavering support for Israel's security and we continue to condemn the horrific terror attacks of 7 October by Hamas," the joint statement said.
"Today's measures are targeted towards individuals who, in our view, undermine Israel's own security and its standing in the world."
Australia's sanctions against the ministers took effect just after midnight.
The Australian Centre for International Justice said the decision by five countries was a significant step and would send a clear message.
"These measures directly respond to the compelling evidence implicating Ben-Gvir and Smotrich in inciting extremist violence and serious human rights violations against Palestinians," the centre's Lara Khider said.
with Reuters
