Critics of Tesla's board have said members lack independence and are too closely allied with Musk, many through financial deals.
Denholm has served on the Tesla Board as an independent director since 2014.
Beginning her working life as an auditor at Arthur Andersen's Sydney office in 1984, Denholm then spent seven years at Toyota Australia, working primarily in finance and consolidation.
Tesla was required to select a new chair of the board as part of a deal between Elon Musk and the Trade and Securities Commission following a tweet that suggested Musk had "funding secured" to take Tesla private.
Musk's successor, effective immediately, will be Robyn Denholm, a former Tesla board member and technology executive.
The settlement with the securities watchdog required Musk and Tesla to each pay $20 million in fines (€17.5 million).
Tesla's board has named one of its own as chairman to replace Elon Musk, complying with terms of a fraud settlement with USA securities regulators.
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However, Denholm will have the hard task of of overseeing billionaire Musk who will still be with the firm.
The news comes just weeks after Tesla posted net profit of $312 million for the third quarter, by far its largest ever.
Directors will create a permanent committee to ensure implementation of the terms of the SEC settlement, which include setting up procedures and controls to oversee Musk's communications - including his tweets.
Tesla, which has never reported an annual profit, also came under strain over production schedules for its Model 3 electric auto, its newest vehicle aimed at a wider market.
But Tesla's stock had tumbled by more than 25 per cent before recovering the $7billion loss the SEC lawsuit incurred.
The company had until next week to name the new chairman.
"I think this is the best possible outcome for everyone involved", said Ivan Feinseth of Tigress Financial Partners, who rates Tesla "neutral", who added the SEC's penalty was only a slap on the wrist for Musk.
Even after the settlement was announced, Mr Musk taunted the SEC, calling it the "Shortseller Enrichment Commission" before snidely praising it for "doing incredible work".