The report ranks 175 nations by adult literacy, education enrolment, per capita GDP and life expectancy of citizens. Australia's solid economy and outstanding enrolment rates in education led it to move up one position from last year's study to go ahead of the Netherlands.
Scandinavian nations topped the ranking, with Norway in first place followed by Iceland and Sweden. Belgium, the US, Canada, Japan and Switzerland round out the top 10. The list has upset Canada, which held the number one position for seven years in a row.
The UK comes in at 13th, while France is 17th, Germany 18th and New Zealand 20th. The bottom 25 spots are all taken by African nations, with Sierra Leone considered the worst.
UN Human Development spokesman Sukehiro Hasegawa said Australia would need to boost per capita incomes and life spans to be recognised as the world's most developed nation.