Robert Ellis, 60, who was also an Australian passport holder, was killed on instructions from his Indonesian wife, they said, with one suspected motive being money.
Residents found the decomposing body of Ellis, who had lived on Bali for several years, early Tuesday dumped next to a paddy field, wrapped up in plastic and blankets.
The wife, Julaikah Noor Ellis, went to the police to report her husband missing soon after the body was found, but she was later detained and named a suspect in the case.
"Our suspicion towards the wife of the victim was first aroused when some of the victim's friends said there have been problems between the couple for a while," detective Wisnu Wardana said.
"After talking to her slowly and kindly for a while, she finally admitted it."