The 6ft 8in, 22 stone lock played in three Premiership games for Sarries earlier this season after joining on a short-term deal from Super Rugby side Warratahs.
The 24-year-old has won 18 Test caps for the Wallabies.
"In a very short space of time here his contribution to the side was superb," head coach Mark McCall said.
"There's still so much more to come from him, which is incredibly exciting for us as he is already a proven international player."
Skelton will be unable to add to his Test caps while with Saracens, as the Australian Rugby Union prevents overseas players with fewer than 60 caps from playing for the national side.
"Not being able to pull on the gold jersey while I am playing in England has made the decision especially difficult, but this is about family as much as it is football," Skelton told the club website.
"One day I'd love to play for Australia again and if that opportunity comes up I will give everything I've got for my country."
Premiership club Saracens have re-signed Australia international lock Will Skelton on a two-year contract.