The 26-year-old was on loan with Perth Glory last season from Japanese giant Cerezo Osaka.
On Saturday, the Wanderers - who finished second bottom last season - confirmed Nicols would be joining them in their bid to improve their attack and creativity in the midfield.
The Wanderers scored just 29 goals in 27 A-League games in the 2014-2015 campaign.
"Mitch has an impressive history in the A-League and his six seasons with Brisbane produced some excellent results including two Championships," Wanderers CEO John Tsatsimas said in a statement.
"He has an unpredictable ability with the ball at his feet which makes him dangerous and his work rate off the ball is a part of his game that often goes unnoticed.
"With over 150 A-League games under his belt and at 26 he is at a prime age for our squad as we reassert ourselves in the competition this season."
Nichols - who has five Socceroos games to his credit - played for Melbourne Victory in season 2013-2014 before joining Cerezo and played 14 times for Glory last term before returning to the Japanese side amid the Glory salaray cap scandal.
Western Sydney Wanderers Hyundai A-League 2015-2016 squad
Goalkeepers: Dean Bouzanis, Andrew Redmayne
Defenders: Jonathan Aspropotamitis, Shannon Cole, Shayne D'Cunha, Brendan Hamill, Scott Jamieson, Scott Neville, Matthew Spiranovic, Nikolai Topor-Stanley
Midfielders: Kearyn Baccus, Mateo Poljak, Jacob Pepper, Andreu Guerao Mayoral, Mitch Nichols
Attackers: Mark Bridge, Romeo Castelen, Labinot Haliti, Golgol Mebrahtu, Brendon Santalab, Jaushua Sotirio
Contracted NYL players: Daniel Alessi, Alusine Fofanah, Liam Youlley
