Hosting the country’s president Thein Sein, Ms Gillard praised the ”extraordinary” progress towards democracy of Burma, also known as Myanmar.
At a joint press conference with Mr Thein, she announced that Australia would lift some restrictions on defence engagement and post a resident defence attaché to Burma.
But the arms embargo and other sanctions would remain for the time being, she said.
Burma was ostracised by the international community for decades due to the rule of its military junta and the lengthy house arrest of democracy leader Aung San Suu Kyi.
But the release of political prisoners including Ms Suu Kyi and successful elections last year has seen Burma embraced by many western leaders. Progress in resolving long-running ethnic conflicts has also heartened international observers.
Burma has loosened up its trade and investment rules, prompting great interest from foreigners looking to establish economic links with the resource rich country.
Ms Gillard also revealed a trade commissioner would also be posted to Yangon, the Burmese capital.
In addition, Australia would also provide an additional $20 million over two years for the first phase of the new ”Myanmar-Australia Partnership for Reform”, she said.
The visit of Mr Thien, a former senior general, is the first by a Burmese leader to Australia since 1974.
Greens spokesman Scott Ludlam said the situation was still ”grim” in Burma despite recent reforms, and that the fledgling democracy there was fragile.
‘Foreign Minister Bob Carr should offer Australia’s assistance in ensuring the 2015 general election is conducted without intimidation and threat of imprisonment of candidates, so that all Burmese citizens – including those in the ethnic minority areas – can exercise their civil and political rights in the lead up to the poll,” he said in a statement.
Earlier on Monday, Senator Carr had praised Burma’s moves towards democracy as offering a ”very happy narrative”.
He said the country passed a ”crucial test” when the ruling party lost 43 of 44 seats at local elections but ”the president remained committed to democracy”.
”Australia has taken a forward leaning policy when it comes to Myanmar,” Senator Carr told ABC radio.