The company's chief executive Satya Nadella announced the big-budget commitment at Sydney event on Thursday, after meeting with Prime Minister Anthony Albanese to discuss the investment.
The cash injection will include spending on data centres, AI skills training for three million workers and cybersecurity collaboration with more federal government departments, including Home Affairs.
It comes almost a year after Amazon committed $20 billion to build AI capability and data centres in Australia by 2029 and one month after reports Google was reconsidering a $20 billion local investment over tax concerns.
The investment would help Australians seize an opportunity to build AI tools and augment businesses, Mr Nadella said, and ensure the technology could be used across multiple industries.
''Australia has an enormous opportunity to translate AI into real economic growth and societal benefit,'' he said.
''That is why we are making our largest investment in Australia to date, committing A$25 billion to expand AI and cloud capacity, strengthen cybersecurity and expand access to digital skills across the country.''
In 2023, Microsoft pledged $5 billion to expand the number of its Australian data centres to 29 and to train one million workers in AI skills.
The larger investment would boost AI's reach, Mr Albanese said, and help more Australians access the technology.
''We want to make sure all Australians benefit from AI,'' he said.
''Our National AI Plan is all about capturing the economic opportunities of this transformative technology while protecting Australians from the risks.''
Microsoft's $25 billion commitment will expand its AI supercomputing and cloud facilities in Australia, though the company did not elaborate on how many data centres it would build or where it would build them.
The company will also expand its cybersecurity services from the Australian Signals Directorate to cover other departments including Home Affairs and offer AI education to an additional three million workers by 2028.
The sizeable spend should be taken as a vote of confidence in Australia as an AI investment hub, Data Centres Australia chief executive officer Belinda Dennett said.
''This investment in new digital infrastructure provides Australia with the opportunity to benefit from and to lead in the most profound technological shift we have ever seen,'' she said.
Embracing AI and creating the infrastructure to support its adoption would be vital to keeping pace with the rest of the world, Telstra chief executive Vicki Brady told the conference.
"To remain competitive, to remain relevant as companies but as a country, (it means) grabbing that opportunity right now and moving fast enough," she said.
Australia could become an Asia-Pacific digital infrastructure hub, according to a recent McKinsey report, but would need $190 billion in investment to boost its computing capacity from 1.5 to five gigawatts by 2030.
The reporter travelled to Sydney as a guest of Microsoft.
