Mr Turnbull says the decision by the Permanent Court of Arbitration in The Hague declaring China having no historical title over the sea must be respected by both sides.
"There is so much at risk in the event of conflict, in the event of heightened tensions, so this is an important decision," he told reporters in Canberra on Wednesday.
Foreign Minister Julie Bishop criticised a call from Labor urging Defence to conduct freedom of navigation exercises.
Federal Opposition Defence spokesman Stephen Conroy has accused China of being a bully, saying its actions have become more aggressive and provocative in recent weeks.
He's told the ABC, Australia should demonstrate support for international law by conducting freedom of navigation exercises in the South China Sea.
"China has been engaged in an aggressive and at times bullying performance and has now been called out by the international court. Australia supports the process. We don't make a judgement at any stage but if countries that are able to just sit back now and ignore the ruling and allow claims to be made that aren't recognized in law - then Australia will be in a situation where we have failed the test in supporting the international system."
Meanwhile, Labor Immigration spokesman Richard Marles says the decision is meaningful and it's important for it to be upheld. But he's told Sky News a gentle hand is also needed.
"It's also important that at this moment we talk about not having an escalation in activity - that we talk about negotiating the ramifications of this decision through in a peaceful way. That's critically important."
Bishop has criticised Senator Conroy's call, saying it would lead to an escalation of tensions.She says the Australian government has consistently said it takes no position on the competing claims over the South China Sea, which is part of an important trade route for Australia.
"We urge all parties to de-escalate tension, not take any action that would provoke or increase tensions. I am rather surprised to hear Stephen Conroy talk about military action at this point."
Former Foreign Minister Bob Carr says any provocation of China over its territorial claims in the South China Sea would make Australia look like the deputy sheriff of the US in Asia.
Mr Carr told the ABC he agrees with the governement's policy of diplomacy over the matter.
"The fact is Australia will always support settlement of these disputes according to international law. China favours direct negotiations between the parties. Australia's got to work a way of getting negotiations that manage these disputes better, minimising the risk of accidental conflict."
