Haisem Zahab, 42, was arrested at Young, in rural New South Wales, on Tuesday, PM Malcolm Turnbull said.
Police allege the electrician was helping to develop a long-range guided missile, and designing a laser device to warn of incoming munitions used by forces in Iraq and Syria.
The arrest did not relate to a planned attack in Australia, Mr Turnbull said.
Mr Zahab was an Australian citizen and planned to provide IS "with the technical capability, and high-tech capability, to detect and develop missiles", the prime minister said.
Australian Federal Police Commissioner Andrew Colvin alleged the man was acting alone and his advice was "fairly sophisticated and well-planned".
He did not appear to have direct experience with missile or laser technology, the commissioner said.
Tuesday's police raid involving dozens of officers followed a complex 18-month investigation.
Extensive search
Police said Mr Zahab was arrested in front of his family, including children, at Young, about 150km (93 miles) north-west of Canberra.
Footage broadcast on the local Nine network showed police with dogs and metal detectors scouring the rural property.
"This is a very technical offence and this gentleman is quite technically minded so we will be doing a complete, thorough forensic examination of that property," Mr Colvin said.
"It could take hours, if not days, and we will leave no stone unturned in what we're looking for."
Mr Zahab is facing two foreign incursion-related charges carrying a maximum penalty of life in prison, and a lesser charge of failing to comply with a police order.
"This highlights that terrorism, support for terrorist groups, and Islamist extremism is not limited to our major cities," Mr Turnbull said.
"It once again shows that we all need to be very vigilant."
Mr Turnbull praised the joint efforts of Australian Federal Police and New South Wales Police.
A man suspected of trying to advise the so-called Islamic State on missiles has been arrested in Australia.