Prime Minister Scott Morrison has commissioned an expert panel to review the decision to deny war hero Teddy Sheean a posthumous Victoria Cross.
Defence Minister Linda Reynolds announced the move in Question Time on Wednesday, saying there needed to be compelling evidence to award honours retrospectively.
Mr Morrison said proof of significant maladministration would also be grounds to overturn the decision.
"The evidentiary standards for recommending the award of the Victoria Cross always have been, and always will be, the highest," he said in a statement on Wednesday.
"This is even more so in the case of consideration of a potential historic award, where compelling new evidence must be identified."
Sheean died in 1942 when the HMAS Armidale was sunk by Japanese bombers in the Timor Sea.
The 18-year-old strapped himself to an anti-aircraft gun as the vessel went down and is credited with saving the lives of 49 crew.
Tasmanians have for years pushed for Sheean to be recognised with the country's highest wartime honour.
Former Australian War Memorial director Brendan Nelson will lead the panel, which also includes barrister David Bennett QC and Peter Shergold, who was once Australia's top public servant.
NSW Anzac Memorial senior curator and historian Brad Manera will join them.
Senator Reynolds said they would investigate whether new evidence had become available since previous reviews, noting there were contested views over what happened.
Federal Labor leader Anthony Albanese believes Sheean should be given a VC.
"This was an incredible act of heroism by this young Tasmanian," he told Sky News.
The Tasmanian Liberal government is continuing to campaign for Sheean.
Tasmanian Veterans' Affairs Minister Guy Barnett said the extraordinary bravery deserves Australia's highest military honour.
"I look forward to reviewing the expert panel's terms of reference and again making the case for a Victoria Cross for Teddy," he said.
The panel will report to Mr Morrison by July 31.