Veteran striker Simon, who missed the 2019 tournament in France due to injury, tore an anterior cruciate ligament in her knee last October and has not played a game since.
Gustavsson said 111-cap Simon, a member of the 2011 and 2015 World Cup squads, was unlikely to be fit for the first match against Ireland on July 20 but was too important as an impact player to be excluded.
"She’s not selected on where she is now. She's selected on where we think she can be in a month from now," he told reporters at the Matildas' new base in Melbourne on Monday.
"She’s based on being a game-changer off the bench."
Having missed the 2019 World Cup in France due to injury, the race to be fit for the tournament co-hosted with New Zealand proved almost unbearable at times for the triker.
"I had doubts in my mind throughout that time, why do I want to play football really? Why do I want to put myself through this?" she told reporters at the Matildas' new base in Melbourne.
"Emotionally, I was a moody wreck some days and then other days I would be on top of the world because I had small wins in my rehab.
"I tried to stay present, just day by day and not think about the World Cup."
Having had no idea whether she would make the squad until a few days ago, Simon said she burst into tears when Gustavsson confirmed she was part of his plans.
"The challenges I’ve faced, it wasn’t a smooth sailing rehab, there were ups and downs," said Simon, who was released by Women's Super League club Tottenham Hotspur a month ago.
"For it to finally come to a head and obviously achieve that goal I set when I underwent surgery was just massive relief, I felt like a weight was lifted off my shoulders."
Gustavsson conceded Simon may not be fully fit for Australia's World Cup opener against Ireland on July 20 but said her ability to be a "game-changer" off the bench made her too difficult to leave out.
The Swede will likely start with Caitlin Foord and captain-striker Sam Kerr up front for the Matildas but Gustavsson also has Mary Fowler and speedy winger Cortnee Vine to pick from.
Simon said she would have no problem seeing team mates selected ahead of her, so long as she could make an impact at some stage.
"I haven't got a whole season under my belt -- or two or three seasons," she said.
"So the discussion with Tony was that maybe I will have a different role.
"Whether I am a starter at some point in the tournament, I'm getting myself in the best physical shape and form that I possibly can be."
Centre-back Kennedy, whose club season with Manchester City was blighted by injuries, has also been included.
Midfielder Chloe Logarzo has missed out after being cut by American club Kansas City in March. She has battled foot problems since recovering from a serious knee problem.
Emily Gielnik, a 57-cap forward, was also omitted after making the provisional squad, having not played since suffering an ankle injury in March and being cut by English side Aston Villa.
The squad includes 15 players who were a part of the 2019 squad for the last World Cup in France.
Seven players will make their World Cup debuts, including defender Clare Hunt and forward Cortnee Vine.
A number of the squad are racing to be fit, including Tameka Yallop and 156-cap centre back Claire Polkinghorne, but Gustavsson said he was satisfied he had sufficient resources to cover through the tournament.
"The medical team has been busy, very busy," he said. "We can't wait to get the tournament under way."
The Matildas are in Group B with Ireland, Nigeria and Canada for the July 20-August 20 tournament co-hosted with New Zealand.
Australia squad:
Goalkeepers: Mackenzie Arnold, Teagan Micah, Lydia Williams
Defenders: Ellie Carpenter, Steph Catley, Charlotte Grant, Clare Hunt, Alanna Kennedy, Aivi Luik, Courtney Nevin, Clare Polkinghorne
Midfielders: Alex Chidiac, Kyra Cooney-Cross, Katrina Gorry, Emily van Egmond, Clare Wheeler, Tameka Yallop
Forwards: Caitlin Foord, Mary Fowler, Sam Kerr, Hayley Raso, Kyah Simon, Cortnee Vine.
