For the first time, this year's Eurovision contestant will be decided by the public.
The 37-year-old singer-songwriter beat out nine other musical acts for the coveted spot, and she reacted in shock and excitement when the announcement was made on Saturday night.
Electric Fields took out second place with their song 2000 and Whatever on 114 points, while Sheppard came in third with On My Way on 87 points.
Of the 10 acts, Miller Heidke won the most votes from the jury and the public.
' Thanks to everyone who voted, and to all the other artists who provided such a brilliant, eclectic and stiff competition.
Rice, who won BBC One's singing competition All Together Now's £50,000 prize a year ago, added that his track "might just be a ballad but that song's got a big message and I can't wait to perform it and show the rest of the world what this song's all about".
Miller-Heidke topped Saturday's scoreboard, narrowly beating electronic group Electric Fields.
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"This could seriously be the year that Australia wins Eurovision!" said SBS Commissioning Editor Josh Martin.
Most notably, Kate has beaten Courtney Act to Eurovision glory, after the Celebrity Big Brother victor and RuPaul's Drag Race royalty entered the national selection with her song Fight For Love.
Co-written with her husband Keir Nuttall, Kate Miller-Heidke's song Zero Gravity explores the singer's experience with post-natal depression, which she suffered after the birth of her son, Ernie, in 2016.
Dressed like one of those retro cakes that has a doll stuck in its middle, Miller-Heidke performed her new operatic pop song "Zero Gravity", which was just released late last month.
The Eurovision Song Contest will be held in Tel Aviv, Israel in May.
Fans said they feel the song could be a victor at Eurovision in May.
Australia competing in Eurovision started with Guy Sebastian in 2015, followed by Dami Im, Isaiah and Jess Mauboy.