The Islamic State group claimed responsibility for the siege, in which a man was killed, several police were injured and a woman was held against her will.
Victoria Police Chief Commissioner Graham Ashton said the gunman, believed to be Yacqub Khayre, was known to police and had a long criminal history.
"We are treating it as a terrorism incident," Commissioner Ashton told ABC.
The gunman was shot dead by police, ending the siege which lasted more than an hour.
