McDonald, who turns 35 next week, spent last season with Dundee United in the Scottish Championship where he scored an impressive 15 goals from 34 games.
But his contract was not renewed at the end of the season and he has now decided to hang up his boots and join BBC Radio Scotland as a football analyst, according to a report in The Scottish Sun which quotes the radio station.
Melbourne-born McDonald started his career with Gippsland Falcons but was a Scottish football legend, netting an amazing 51 goals from 88 games with Celtic in three seasons between 2007 and 2010.
He joined the Old Firm side from Motherwell just after he had notoriously scored against the Bhoys and handed the title to bitter Glasgow rivals Rangers.
His deadly form in front of goal earned him an offer to the English Premier League with Wigan but that was spurned in favour of a switch to the English Championship to reunite with old boss Gordon Strachan at Middlesbrough.
In a struggling side, he still scored 37 goals from 116 matches and then spent two frustrating seasons at Millwall before returning to Scotland and a move back to Motherwell, scoring another 24 goals from 83 games.
He was tipped to join the A-League last season but a deal with Western Sydney Wanderers fell through and he joined the Arabs at Tannadice instead.
Despite his lethal touch at club level, McDonald was notoriously unable to transfer his talents to the international stage.
In 26 games for the Socceroos under coaches Holger Osieck and Pim Verbeek, he never scored once. His last game in green and gold came in the 3-1 defeat against Scotland in 2012.
As he considered a move home last year, he said: "I'm still fighting fit and feel as good as ever. I'm not ready to retire just yet. There's still life in the old dog.
"I'd be lying if I said coming home didn't interest me. Obviously last summer nothing came of it.
"I'm still here, available and can more than do a job but it's not up to me, it's up to others."