The former Celtic and Middlesbrough forward had joined the Steelmen on a short-term basis in February, and bagged five goals in 10 matches as Motherwell retained Premiership status by seeing off Rangers in the play-offs.
McDonald, 31, who reportedly turned down a number of offers to stay in North Lanarkshire, has the option of a second year on his contract.
The Australian striker, who has 26 caps for his country, joins Louis Laing and Lionel Ainsworth in pledging his long-term future to the club, while Motherwell boss Ian Baraclough has also bolstered his squad with the signings of David Clarkson, Wes Fletcher, Louis Moult, Kieran Kennedy and Joe Chalmers.
McDonald - who joined Motherwell in 2004 and scored 42 goals in 108 appearances - will wear the number 77 jersey, and told MFC TV: “I’m delighted it’s all been sorted as there had been a bit of speculation. It’s great to have joined and I can’t wait until the start of the season.
“I have nothing but good memories from my time at Motherwell and the warmth from this football club and what it gives me, and vice-versa, was a big attraction for me coming back.
“It’s a family orientated club and my family is ever growing, with a new arrival on the way, so a lot of that was taken into consideration. and where we would be happy as a family as well as where I would be happiest playing my football.
“I really enjoyed the end of last season and am hoping for some success here this season.”
Motherwell manager Ian Baraclough said he was ‘delighted’ to secure McDonald’s services ‘for at least one more year’, adding: “He carries a threat, that was proven in the last few months of the season, but we also think he can help assist in the development of other strikers at the club too.
“Whilst Lee Erwin finished the 2014/15 season fantastically well, it would be remiss to not acknowledge the role Scott played there and that was very much in our mind when setting our strategy for this summer.
“He’s also the type of player who will demand from himself and others around him and that’s something I see as a huge benefit.
“The squad in general is really taking shape now albeit we’re still in the market for both a goalkeeper and a centre midfielder, which we hope to tie up shortly.”