Hundreds of family, friends and members of the public are attending the service at St Andrew's church in Brighton.
Senior politicians paying their respects include former prime minister John Howard, former governor-general Sir Peter Cosgrove, Attorney-General Mark Dreyfus, Opposition Leader Peter Dutton and former treasurers Peter Costello and Josh Frydenberg.
On Thursday, flags at government buildings in Victoria and the Australian Capital Territory were flown at half-mast in remembrance.
The father of four and former defence minister died in early November aged 72 after a long battle with Alzheimer's disease.
Mr Reith served as the member for Flinders, on Victoria's Mornington Peninsula, from 1982 to 1983 and from 1984 to 2001.
He was the Liberal party's deputy leader from 1990 to 1993 and served as a minister in the Howard government, having the portfolios of industrial relations, small business, employment and workplace relations and defence.
Opposition Leader Peter Dutton said he would be remembered for his fearlessness during the waterfront dispute in the late 1990s and efforts on workplace reforms.
Mr Reith was involved in the Tampa affair and children overboard incident in the lead up to the 2001 election, along with then-prime minister John Howard and immigration minister Philip Ruddock.
The trio claimed on navy advice that children had been thrown off a leaky boat, apparently to force HMAS Adelaide to take them on board.
The information was later proven incorrect.
After leaving politics in 2001, Mr Reith was a political commentator and served as a company director.
