The decision, announced on Sunday, means the 186-year-old site, along with Victoria Barracks Melbourne, Fort Queenscliff and Point Cook (RAAF Williams), will be transferred from Defence to the Finance Department. HMAS Penguin, in Sydney's Mosman, will be partially divested.
The government will work with the Australian War Memorial to transform the sites into public spaces that tell the history of Australia's military. Some areas will still be used for commercial purposes.
Defence minister Richard Marles denied the thwarted sales would seriously hurt the federal budget, saying they were never expected to make a lot of cash.
"The (Department of Finance) will manage them in a way which seeks to maximise community and commercial use, and so there will be some return," he told ABC Radio National.
Dozens gathered to celebrate the decision on Monday, including outspoken Liberals against the sale.
"The solve is not to sell places like Victoria Barracks, Sydney. It's to look at exactly why things are costing so much," Senator Jess Collins said.
"Everything in these bases is outsourced, they even outsource the outsourcing. The whole thing is ridiculous."
Opposition Defence spokesperson James Paterson previously said the U-turn made him concerned the government would not be able to meet its budget. He was against the sale of the sites and felt they should never have been included in the government's savings calculations.
All sites slated for sale - 67 in total - were budgeted at about $3 billion. Mr Marles said he had expected a net return of roughly $1.2 billion.
"That's not a large number in the context of 67 sites, and the only way you get to that number is if there is a relatively small value that has been placed on big sites like Victoria Barracks Sydney," he said.
The government is continuing to find savings measures to plug its trillion-dollar debt in other areas.
Prime Minister Anthony Albanese used a press conference on Monday to urge the Greens and Opposition to pass savings measures, including winding back the over-65s private health insurance rebate.
The government does not have a majority in the Senate, where many bills are held up.
Opposition Veteran Affairs spokesperson Michael McCormack said returned servicemen had been put through "months and months" of angst because the Albanese government was unable to reconcile its debt.
"It's a necessary backdown, but it's an embarrassing one," he told Radio National.
"Why sell it in the first place?"
