It finished 6-4, 4-6, 2-6, 6-3, 6-4 after four hours on the Rod Laver Arena to give the 32-year-old Serb a 17th Grand Slam singles crown as well as a return to the world number one ranking.
The triumph in Melbourne places him two titles behind Rafael Nadal and three shy of Roger Federer on the all-time winners list.
His latest victory in Melbourne was the first time he had been taken to five sets in the final since 2012 when he and Nadal battled for five hours and 53 minutes. That was his third title.
"This tournament sets a high standard for all the other tournaments around the world," said Djokovic after receiving the Norman Brooks Trophy.
"It is definitely my favourite court and my favourite stadium in the world and I am blessed to hold this trophy once again."
Nerves
Thiem, who was playing in his first Australian Open final, started tentatively and lost his opening service game. But he eventually fought back to level in the first set. However the 26-year-old faltered when serving to gain parity at 5-5.
But then the fifth seed swept through the next two sets as Djokovic appeared hampered by a leg injury.
The second seed recovered his poise to take the fourth set and broke early in the fifth set. He fought off break points that could have brought Thiem back to 2-2 in the decider but he held on for a 3-1 lead.
Feat
Thiem was unable to fashion any more chances to draw level and Djokovic kept his nose in front to extend his record at Melbourne Park.
"Congratulations, an amazing achievement," said Thiem as he collected the runners-up plate. "Congratulations also to all your team. It is unreal what you are doing throughout all these years.
"You, Novak, and two other guys [Roger Federer and Rafael Nadal] have brought men's tennis to a complete new level and I'm really proud and happy to be competing in these times and this period of tennis.
"I fell a little bit short today but I hope that I can get soon my revenge. Well done. Congrats."
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