Only people who live with a confirmed COVID-19 case would be classified as a close contact under a proposal to be considered by national cabinet.
The federal government will also subsidise rapid antigen tests, with Prime Minister Scott Morrison declaring Omicron had created a "new phase" in Australia's battle with COVID-19.
Mr Morrison has brought forward a meeting with state and territory leaders initially scheduled for next week, as cases explode at an exponential rate across the country.
Mr Morrison on Wednesday said they would consider a proposed national definition of a close contact, which would only include classify people living with, or in the care of, a confirmed COVID-19 case who had spent longer than four hours with the infected person.
The Prime Minister said a person who briefly visited a restaurant while a COVID-19 was present would not be forced into isolation.
"We can't have everybody just being taken out of circulation because they just happen to be at a particular place at a particular time," he said.
"The uncertainty of that, the impacts on the economy, and particularly given the fact we are not seeing this impact on our hospital system means that it's an impractical way to live with the virus in this next phase."
PCR tests would be recommended only for symptomatic people, international arrivals, healthcare workers, and vulnerable groups.
Close contacts would also only have to isolate for seven days, and undergo rapid antigen tests on day six and day 12 after their exposure.
Mr Morrison said Omicron - highly infectious, but less likely to produce serious symptoms in an individual - posed a different challenge to Australians than previous strains of the virus.
He revealed the Commonwealth would look to bolster the system by subsidising rapid antigen tests - less accurate than PCR tests, but providing a quick turnaround.
Mr Morrison confirmed the Commonwealth would seek a 50/50 funding to split with state governments to make rapid antigen testing free.
The move is designed to take away the reliance on PCR testing which has been under strain over the Christmas period.
Mr Morrison said subsidising the cost of rapid testing, which has been in Australia since August for COVID-19, would be on the national cabinet agenda on Thursday.
The federal government has set aside $375 million to procure more rapid tests for the national stockpile.
"State governments are responsible for securing those tests, or the supplies that go with those tests, the arrangements that go with the conducting of them, and the Commonwealth shares those costs 50/50," Mr Morrison said. "The same is true for RAT tests."
The Prime Minister confirmed four million rapid tests had already been delivered and said another six million would be delivered "very soon".
"In our discussions with our suppliers to the private industry, they notify they have significant supplies coming in. We are talking about the tens of millions into private channels," he said.
Further tests would be approved by the Therapeutic Goods Administration in the coming months.
NSW Premier Dominic Perrottet on Wednesday agreed a national approach to closed casual contact definitions, as well as isolation lengths, was required.
Premier Perrottet begged NSW residents who were not suffering symptoms to avoid PCR queues, with many waiting more than four days for results.
More to come.
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