The plan was announced as Australia and the Philippines staged joint military exercises, which included live-fire drills and involved about 3,600 personnel, in the western and northern Philippines.
Beijing and Manila have had a series of confrontations in the disputed South China Sea, a crucial waterway China claims in almost its entirety despite an international ruling that its stance has no legal basis.
"We both acknowledge and are experiencing the pressure that the rules-based order is being placed under here in the Indo-Pacific," Australian Defence Minister Richard Marles told reporters after meeting his Philippine counterpart in Manila.
He said the new pact, expected to be signed next year, would seek to boost the Philippines' defence infrastructure and better coordinate military exercises between them.
"This will be a really important step forward in terms of our defence relationship," Marles said.
The Philippines, a US treaty ally, has been deepening its network of alliances with like-minded countries to counter China's growing assertiveness in the Asia-Pacific region.
It signed a visiting forces pact with New Zealand this year and similar deals are in the works with France and Canada.
The Philippines also separately held its first joint patrols in the South China Sea with India this month.
"What we cannot control are the unilateral activities of China. Hence, the need for deterring China and giving the strong message that their activities will not be tolerated by the international (community)," Philippine defence chief Gilberto Teodoro said.
The Philippine military reported on Thursday that at least five Chinese Coast Guard ships, equipped with high-calibre weapons, had conducted drills on the use of water cannon near the disputed Second Thomas Shoal in the South China Sea.
A rusty warship, the BRP Sierra Madre, was grounded atop the atoll in 1999 to assert Manila's presence in the area and has served as a garrison for a handful of Filipino troops.
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