Bishop Max Davis is believed to be the most senior clergyman in the Catholic Church, and the first bishop, to be charged with a child sex offence.
The 68-year-old is due to appear in Perth Magistrate's Court on July 25, charged with three counts of indecent treatment of a child under 14.
The alleged incident took place when Bishop Davis was teaching at St Benedict's College in New Norcia, north-east of Perth.
The Church said Bishop Davis was not an ordained priest when the incident is alleged to have occurred, and that he "emphatically denies" the charge.
"An allegation has been made to the police that in 1969 Bishop Max Davis abused a student at St. Benedict's College in New Norcia," said a statement from the Catholic Military Ordinariate of Australia.
"At that time - 45 years ago - the bishop was not ordained. The bishop emphatically denies the allegation and the charge will be defended."
The statement said Bishop Davis would stand aside from his office and his role as Catholic member of the Religious Advisory Committee to the Services while the matter was dealt with by the courts.
According to The Catholic Weekly, Bishop Davis grew up in Perth and was ordained in 1971.
He is one of a long line of military bishops to have served the Defence Forces.
He was in the Navy in the early 60s, according to the weekly. He has been Australia's military bishop since 2003.
Francis Sullivan, the chief executive of the Catholic Church's Truth Justice Healing Council, said Bishop Davis had done the right thing by stepping aside.
"Look, this is a distressing day. It's the first time that a serving bishop has had to step aside because of police charges," he said.
"It's important though to remember that these are just allegations.
"We don't know why he has been charged now. But what we do know... every allegation of child abuse needs to be examined and the bishop has done the right thing and stepped aside."