Turnbull, a 60-year-old multimillionaire former banker and businessman who holds socially moderate views within the conservative Liberal Party, increased the number of women in cabinet from two to five.
The sweeping changes also saw some key Abbott allies from the party's right wing left out of cabinet in favour of younger and more moderate candidates.
Some Abbott allies stepped aside or refused portfolios, with the resignation of Treasurer (finance minister) Joe Hockey from parliament the biggest surprise.
"Today I'm announcing a 21st century government and a ministry (cabinet) for the future," Turnbull told a press conference in Canberra, describing the changes as "very extensive".
Senator Marise Payne, who had held the human services portfolio, was given the defence ministry.
Michaela Cash was appointed Minister for Employment and Women, while Kelly O'Dwyer assumed the assistant treasurer and small business portfolios.
Julie Bishop remained as foreign minister and Sussan Ley as health and sports minister.
Turnbull supporter Attorney-General George Brandis was appointed Senate leader but lost the arts portfolio to another backer of the new PM, Mitch Fifield, who was also given communications.
Turnbull has made economic policy a key tenet of his new administration, promising to speak honestly about the country's challenges as it transitions from mining-led growth following an unprecedented resources investment boom.
The new prime minister, also a former barrister, emphasised the importance of science and technology as he appointed Education Minister Christopher Pyne to the expanded infrastructure, innovation and science portfolio.