Williams was pregnant with her first child when she won here previous year to collect her Open-era record 23rd Grand Slam singles title.
The world number 22 said: "My coach and team always said "only go to tournaments when you are prepared to go all the way". I can compete, but I don't want to just compete.
She gave birth in September and played in an exhibition tournament last week.
Serena Williams' decision not to defend her Australian Open title four months after giving birth to her first child had nothing to do with merely being able to play at Melbourne Park. But, after losing to French Open champion Jelena Ostapenko in an exhibition tournament in Abu Dhabi last week, the pro has made a decision to take some downtime before heading to the Melbourne competition later this month.
The season's first major starts on January 15 at Melbourne Park and seven-time Australian Open champion Williams will be missing it for the first time since 2011.
"After performing in my first match after giving birth I realized that although I am super close I'm not where I personally want to be". In Abu Dhabi, Williams was clearly sluggish and had problems with her serve.
Williams, whose Grand Slam tally is just one shy of the all-time record held by Australian Margaret Court, said she was disappointed to withdraw, but looked forward to returning in the future.
She had won the tournament seven times, with her first victory coming in 2003.
There are also fitness concerns regarding top seeds Rafael Nadal and six-time champion Novak Djokovic, although Nadal has landed in Melbourne and was seen hitting the courts.
Australian Open tournament director Craig Tiley expressed his admiration for her efforts to return to the game she loves. Her confidence was reportedly shaken after losing to Jelena Ostapenko in her comeback match at the French Open. The 36-year-old went on to win the tournament, defeating her sister in the final, before taking the remainder of the year off.