It allowed New Zealanders who arrived in Australia between February 26, 2001, and February 19, 2016 and who have earned more than A$53,000 a year for five consecutive years to apply for permanent residence from July 1, 2017.
But under the new rules, they would then need to wait another four years to become citizens.
Prime Minister Malcolm Turnbull said the Government was "strengthening our multicultural society and strengthening our commitment to Australian values" through the announcement.
He said proficiency in the English language is "the single best thing any person coming to this country can do".
"They've lived here for four years, they speak English, and they share our values and can be integrated into society," Turnbull said in Canberra today.
Some of the new citizenship test questions will canvass issues such as domestic violence, female genital mutilation, and child marriage.
Applicants will only be allowed to sit the citizenship test three times.
"We need to ensure that our citizenship test enables applicants to demonstrate how they have integrated into and engaged with our Australian community, so that they're part of the community," Turnbull said.
Turnbull added citizenship should be an honour.
"There is no more important title in our democracy than Australian citizen," he said.
"Australian citizenship should be honoured, cherished. It is a privilege."
Immigration Minister Peter Dutton denied the changes were targeted at any one religion, but rather at particular behaviour and attitudes.
"They're pointed at people who might think that domestic violence is okay. Well it's not," he told the Seven Network ahead of the announcement.
Foreign Minister Julie Bishop told Nine Network's Today Show today she did not believe the reforms would alienate people at risk of radicalisation.
"I don't think anyone could seriously defend an attitude that says women are not equal to men, or that violence against women is acceptable."
The citizenship crackdown follows the decision to overhaul the 457 temporary foreign worker visa system.
The government is also pursuing several other citizenship reforms, which will apply to all new applicants.
Applicants must now show the steps they have taken to integrate into and contribute to the Australian community - with evidence of employment, membership of community organisations, school enrolment for all eligible children.
Applicants who cheat during the citizenship test will now automatically fail.
Prospective citizens with a permanent or enduring incapacity, as well as those aged under 16, would be exempted from the English reading, writing and listening test.
Labor's foreign affairs spokeswoman Penny Wong doesn't understand the need for the changes.
"If English grammar is the test there might be a few members of parliament who might struggle," she told ABC radio.
The existing pledge ensured new citizens committed loyalty to Australia, its people and its laws.
"I think those sentiments are pretty good," Senator Wong said, noting the opposition was yet to see the details.
One Nation leader Pauline Hanson is again taking credit for the government's latest crackdown.
"Good to see the PM is finally acting on the suggestions I made to him about the citizenship test," she tweeted today.
She wrote on Facebook: "It looks like Malcolm Turnbull is finally acting on my suggestions to improve the citizenship test. I spoke with him about this just after I was elected so it seems I must have been convincing."
Earlier in the week, Senator Hanson said while the government might deny it was talking tough on temporary foreign worker visas because of One Nation, "we all know the truth".
"Looks like Malcolm Turnbull has been reading One Nation 2016 campaign flyers for inspiration. Should I get a speech writing credit?" she said.
Key components of the new citizenship test:
* Applicants must be permanent residents for four years before seeking citizenship (up from 12 months now).
* Must demonstrate competent English language skills through a tougher reading, writing and listening test (people with permanent or enduring incapacity, or aged under 16, exempted).
* Must show steps taken to integrate into and contribute to the Australian community (evidence of employment, membership of community organisations, school enrolment for all eligible children).
* Citizenship test will include "new and more meaningful questions" about an applicant's understanding of and commitment to Australia's shared values and responsibilities.
* Applicants who cheat during the citizenship test will automatically fail.
* Tougher criminal history checks, including involvement in gang activity or domestic violence.
* Wording of the citizenship pledge will change.
