After his death, West Australian premier Alan Carpenter stood next to Ledger's father Kim and announced a new venue in his hometown of Perth would be named the Heath Ledger Theatre. Mr Ledger said he was honoured and intensely proud.
But the government has now scrapped the plans for the new $91m (pounds 36m) performing arts complex after the star, just four months after they were announced.
The new premier Colin Barnett said the decision had been reversed and Ledger would be commemorated in another part of the complex.
Ledger died from an accidental prescription drugs overdose in New York in January. He was 28.
Mr Barnett said: "He was a young actor who had some great successes, and I have no doubt was headed for an outstanding career.
"But he lost his life at a very young age, so we never saw the true achievement that Heath Ledger may have made."
The decision to name the theatre after Ledger divided the local arts community. Some artists and performers spoke out at the time, labelling the move a cynical marketing exercise, because Ledger was not a theatre actor. They likened the plans to naming an concert hall after AC/DC frontman Bon Scott.
Ledger grew up in Perth and retained a close connection to the city, despite spending the majority of his time in America.
Shadow treasurer Ben Wyatt said the move had "disappointed" the Ledger family, who have declined to comment on the matter.
"It genuinely distresses me that he [Mr Barnett] could have such callous disregard for the Ledger family, who've got through an enormous amount of distress over the loss of Heath," he said.
"Alan Carpenter spoke to Kim Ledger this morning and the family is disappointed that this issue has come up again and described the way the premier has done that as an unsavoury process."