Peter Dutton has blocked a decision by Chief of Defence Angus Campbell to strip unit citations from special forces troops who served in Afghanistan.
More than 3000 soldiers will no longer have their awards taken away.
Instead, only those convicted of war crimes will lose their meritorious unit citations.
Mr Dutton said while it was important to ensure people who did the wrong thing were held to account, he did not want the many punished for the actions of a few.
"We shouldn't be punishing the 99 per cent for the sins of one per cent," the defence minister told 2GB radio.
General Campbell moved to strip special forces troops of their citations late last year in response to the damning Brereton inquiry, which found evidence of war crimes committed in Afghanistan.
The report found up to 25 soldiers were involved in the alleged murders of at least 39 Afghan civilians and prisoners, and recommended charges be pursued against 19 of them.
It also recommended cancelling the meritorious unit citations of Special Operations Task Force 66.
General Campbell accepted the recommendation but senior ministers stalled his decision within days in response to widespread backlash.
Mr Dutton formally overturned the decision ahead of Anzac Day on April 25.
"This says to people very clearly before Anzac Day that we want to reset, that we want to provide support to those people who have served our country, and who have died in that service," he said.
Mr Dutton denied undermining the Chief of Defence despite overruling his decision, arguing General Campbell was still the best person for the job.
A Defence spokesperson confirmed members of Task Force 66 could continue to wear the citations unless convicted in a court of law or identified by the department as undeserving of the honour.
"This decision provides certainty for all current and former serving Defence personnel authorised to wear the MUC insignia," the spokesperson said.
The decision follows confirmation the last Australian troops will leave Afghanistan by September in line with a timetable set by the United States, bringing the 20-year war to an end.
The government has also announced a royal commission into veteran suicides.
There have been more than 450 deaths by suicide in the defence and veteran community in the past 20 years.
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