Vietnamese police arrested the retired baker in January 2019 and a court convicted him of "terrorism" 10 months later, sentencing him to 12 years in prison.
The trial lasted a matter of hours and raised serious due process concerns.
The case was based on his affiliation and activities with an opposition political party, Viet Tan, which operates lawfully Australia.
Mr Kham's wife and two children thanked the Australian government for securing his release.
They also thanked their legal team and many organisations involved.
"We share this happy news that Chau Van Kham is well and has returned to his family today," his family said in a statement on Tuesday.
Sydney-based cabinet minister Chris Bowen posted a photograph on Twitter with the freed man, writing: "Today is a good day."
"Pleased to welcome Mr Chau Van Kham back to Australia and to see him reunited with his family," Mr Bowen said.
"The Australian government thanks the government of Vietnam for facilitating his transfer."
Prime Minister Anthony Albanese, who raised the matter during his visit to Vietnam, said it was an example of "constructive engagement".
"I thank our friends in Vietnam for listening and for agreeing, during my visit there, for this to occur," he told reporters in Berlin.
Human Rights Watch's Asia director Elaine Pearson said while the release was fantastic news, more than 150 political prisoners remained in detention in Vietnam for peaceful acts of free expression.
Among them were journalist Pham Doan Trang and environmental activists Mai Phan Loi, Dang Dinh Bach and Hoang Thi Minh Hong.
"The one-party state has no tolerance for anyone who expresses a narrative contrary to the government and the Australian government should continue to call on Vietnamese authorities to release all political prisoners," Ms Pearson said.
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