Quinn Macnicol’s goal in first-half injury time cancelled out Poramet Laoongdi’s 33rd minute strike as the match ended 1-1 after 90 minutes.
Australia thought they had the lead on 75 minutes but Anthony Didulica’s goal was ruled out after a VAR check for handball, reports the Bangkok Post.
Thailand also came close to scoring in stoppage time but a shot by Natthakit Phosri just missed the target.
The defeat ended Thailand’s hopes of a second Asean U16 crown after their maiden victory in 2015.
“First of all, we have to congratulate Australia for winning the tournament,” said Thailand coach Jadet Meelarp.
“Australia played well and it was a very close game and the result had to be decided by a penalty shoot-out.
“For some of the boys this was their first international tournament so they were quite nervous. It’s a pity we didn’t win but I have no regrets because every player fought hard from the first round and they showed a good fighting spirit,” he added.
Hosts Indonesia defeated Vietnam 5-0 in a third-place match.
Thailand will next play in the AFC U17 Championship qualifying round in Chon Buri between Oct 23-27. They are in Group D along with Brunei, India and Turkmenistan.
“We will have the AFC U17 Championship qualification round in October,” added Jadet.
“When we get back to Thailand, we will talk about our preparation and the training to build up fitness of the players. Our goal is to qualify for the FIFA U17 World Cup finals.”