He had been set to start at centre alongside Ireland teammate Bundee Aki, but was ruled out after self-reporting concussion symptoms in training on Thursday.
He has suffered a setback in his recovery, though, forcing Farrell into a last-minute rotation, with Huw Jones reintroduced to the XV.
Farrell said: “Garry was actually selected and unfortunately, after training, he’s had to pull out.
“It’s head-related again. It was literally as I was walking off the field. He came to me, and once that’s mentioned, that’s that.
“There was no incident. He was feeling good well in advance of Tuesday. He was fit and ready to play.
“There was no incident through the game on Tuesday at all, nothing yesterday (Wednesday) and nothing this morning, but with these type of things players are getting very good at telling the truth of how they feel, so it was a no-brainer to make the change straight away.
“It’s very easy to keep it to yourself and lie and not be honest and open. It was very big of him and the right thing to do, 100 per cent. For the team as well, not just for Garry.
“It’s unfortunate for Garry but we’ve always said it’s about the squad, and nothing but about the squad.”
Owen Farrell drops to the bench after captaining the side against Pasifika, while Marcus Smith misses out entirely, replaced by fit-again Blair Kinghorn.
Aki’s inclusion is one of three changes to the XV from the first test. Ellis Genge started in Brisbane but will serve as a replacement in Melbourne. Also dropped are Joe McCarthy and Sione Tuipulotu.
Joe Schmidt has also rotated his Wallabies outfit, with Will Skelton, Rob Valetini, and David Porecki all returning.
“The squad has recovered well after a very physical first Test and the week’s preparation here in Melbourne has allowed us a bit more time together,” he said.
Lineups for British and Irish Lions vs Australia
British & Irish Lions: Keenan, Freeman, Jones, Aki, Lowe, Russell, Gibson-Park; Porter, Sheehan, Furlong, Itoje, Chessum, Beirne, Curry, Conan
Replacements: Kelleher, Genge, Stuart, Ryan, Morgan, Mitchell, Farrell, Kinghorn
Australia: Wright, Jorgensen, Suaalii, Ikitau, Potter, Lynagh, Gordon; Slipper, Porecki, Alaalatoa, Frost, Skelton, Valetini, McReight, Wilson
Replacements: Pollard, Bell, Robertson, Williams, Gleeson, Tizzano, McDermott, Donaldson
