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The Reserve Bank of Australia (RBA) says the new design will pay tribute to the culture and history of Indigenous Australians.
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The bank will first consult with Australians in designing the $5 banknote. It will take years for the new banknote to be designed and printed. In the meantime the current $5 banknote will continue to be issued.
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The A$5 banknote is the only Australian banknote with an image of the British monarchy. The late Queen also appears on the country's coins, although Australia is transitioning to using an effigy of King Charles.
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The RBA said it has not yet set a date for when it will reveal the new design for the $5 note. The decision was welcomed by tribal politicians and community leaders.
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As British monarch, he is also the head of state of Australia, New Zealand and 12 other Commonwealth states outside the United Kingdom. The role is largely ceremonial.
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Each series of Australian banknotes has featured a portrait of the British monarch on at least one design. In a 1999 referendum, Australian voters chose the British monarch as the country's head of state.
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