Over 16 years Goulburn's high-security Supermax facility has housed some of Australia's most notorious criminals, including serial killer Ivan Milat.
Now, the New South Wales government says the jail will be upgraded to include a specialised unit to house up to 54 convicted terrorists.
Specially trained corrective officers are also being introduced to work on new deradicalisation programs.
The upgrades will cost $47 million over three years, and the government hopes to have it completed by the end of 2018.
Premier Gladys Berejiklian says with recent terror attacks around the world, nothing can be left to chance.
"The incidence of terrorism activity we've seen across Australia and around the world has been unprecedented in modern times and we need to react to that in the most comprehensive way possible and I'm pleased to say that we have both the resources, the intelligence and the know how to do that."
At present, 33 of the 45 inmates in Supermax at Goulburn have been convicted of, or charged with, terrorism-related offences.
The state's Corrective Services figures state that only five inmates had been radicalised over the past decade.
New South Wales Treasurer Dominic Perrottet says it is a small number, and it must remain that way.
"Prisons should be places of rehabilitation, not radicalisation. We want to make sure that those prisoners who may not regret their actions and wish to spread hate in prison are not given that opportunity. We're going to separate them and watch them like hawks."
Immigration Minister Peter Dutton has applauded the state government.
"Well there are reports now about people that are being radicalised within the prison systems. People that had no background, no ideology, no religious belief that would indicate that they might be susceptible to being radicalised. Now if that is happening with people within the mainstream of prison systems then that is a significant concern. And as I say the states have a responsibility to make sure that people are being rehabilitated, that that evil is not being spread."
But counter-terrorism experts and lawyers have questioned whether the new facility would have the perverse consequence of further fuelling terrorism.
Australian National University criminologist Clarke Jones told Fairfax Media the isolation of inmates could create further resentment, whilst removing any chance of rehabilitation for young prisoners.
He says the chance of radicalisation spreading within prisons is low because convicted terrorists are considered at the bottom of the pecking order.
Meanwhile, barrister Greg Barns says segregated prisons overseas have failed to reduce deradicalisation.
New South Wales Corrective Services Commissioner Peter Severin has defended the approach.
"It is very important that we have a strong focus on risk. So if we simply disperse people into all sorts of areas within the system, chances are they will cause a lot more harm than providing them with opportunities to progress within a very controlled environment. And in a way that will allow us eventually, hopefully to get them to disengage, and then of course they can move through the prison system."
He says life in the new facility will be tough.
"So it could be that we limit the communication to English only. The levels of control are significant in relation to any kind of outside communication, which is what we're most concerned about. Within the areas it will be about associations, and access to any other services as required."
New South Wales Counter Terrorism Minister David Elliott says returning so-called foreign fighters could also find themselves housed in the new facility.
"Intelligence agencies both here and overseas are monitoring over 100 Australians that are on the battlefield of Syria and Iraq fighting against the allied forces. We expect that some of them will come back. And if they do come back, there will be charges laid, with the evidence and brief collected. And this facility will be happy to house for as long as the court tell us to house them."
