Festival director Katrina Segwick says the move means Adelaide is now one of a small number of festivals throughout the world that offers substantial cash awards. Others include Berlin, Karlovy Vary, Pusan, Tribeca and Tokyo.
"We are looking for films that have a distinctive voice, bold storytelling and creative risk-taking," she said.
Twelve films finished after January 1, 2006, will be chosen to participate in the first competition, held as part of the 2007 event, which runs from February 22 to March 4. They will be judged by an as-yet-unnamed international jury.
Sedgwick believes the introduction of the competition will make it easier to convince distributors and filmmakers to make their films available and to attract some of the world's most innovative filmmakers.
It will also lead to patrons having a more enjoyable experience and increase the amount of publicity the festival can generate. Securing films can be very competitive.
The fledgling Adelaide Film Festival was already unique in Australia. It is the only one that puts money into Australian films, rather than just being a passive screener, thanks to an investment fund worth $0.8m (A$1m) per festival.
Recipients due to premiere next year include director Rolf de Heer'sDr Plonk, Kriv Stenders' Boxing Day, Michael James Rowland's Lucky Miles and Tony Ayres' Home Song Stories.
The South Australian Government announced last week that it had taken its first steps towards establishing a new film and television precinct in the heart of Adelaide with the South Australian Film Corporation being a core tenant.
This means it will be leaving the industrial estate in Hendon that has been its home for 25 years.
"The SAFC's facilities have not been upgraded for a considerable time," said South Australian premier Mike Rann.
"The relocation would include an upgrade of the sound stages, screening and mixing theatres and production facilities."
"The co-location of industry players and educational institutions would result in the formation of a vibrant screen cluster [which would] allow South Australia to remain at the forefront of the increasingly more cost conscious global film industry," said Rann.
Adelaide business consultants Connell Wagner have been commissioned to explore future options for South Australia's involvement in the film industry but is unlikely to recommend the establishment of infrastructure of the scale of the Gold Coast's Warner Studios, Sydney's Fox Studios or Melbourne's Central City Studios.