Education ministers made the decision to bin the NAPLAN tests at a meeting on Friday. The exams were scheduled for May.
The ministers said cancellation would help teachers and principals "focus on the wellbeing of students and continuity of education, including potential online and remote learning".
"Further, the impact of responses to the COVID-19 virus may affect the delivery of NAPLAN testing, including the operation of centralised marking centres and the implications for nationally comparable data if an insufficient number of students are available to do the test," they said in a statement.
But they reiterated the strong medical advice that schools should remain open for now.
"Education departments and systems will continue to closely monitor health advice and work with schools to ensure appropriate support for students and staff as the response to COVID-19 develops," they said.
The cancellation also means testing of the expanded online NAPLAN platform, supposed to start next week, now won't happen.
In 2019, the first widespread trial of NAPLAN online was plagued by technical issues, with many students unable to complete their tests first go.
Some states have questioned the usefulness of NAPLAN, with NSW, Queensland and Victoria reviewing whether the standardised testing gives parents and teachers diagnostic information in the most efficient way.
But federal education minister Dan Tehan has previously defended it, saying the tests did provide valuable information.