Federalism was adopted, as a constitutional principle, in Australia on 1 January 1901 – the date upon which the six self-governing colonies of New South Wales, Queensland, South Australia, Tasmania, Victoria, and Western Australia federated, formally constituting the Commonwealth of Australia. It remains a federation of those six original States under the Constitution of Australia.

Australia is the seventh oldest surviving federation in the world after the United States (1789), Mexico (1824), Switzerland (1848), Argentina (1853), Canada (1867), and Brazil (1891). Australia's implementation utilised competitive federalism with the federal government lack of involvement in state matters.

Relatively few changes have been made in terms of the formal (written) constitution since Australian federation occurred; in practice, however, the way the federal system functions has changed enormously. The most significant respect in which it has changed is in the degree to which the Commonwealth government has assumed a position of dominance.

Instigated by Henry Parkes' Tenterfield Oration of 24 October 1889, the Australian Colonies conducted a series of constitutional conventions through the 1890s. These culminated in a draft Constitution that was put to popular vote in the individual colonies, and eventually approved by the electors, after a final round of changes met the higher threshold of support required in New South Wales. It was then passed into law by the Imperial Parliament in Britain as the Commonwealth of Australia Constitution Act 1900, finalising the process of the Federation of Australia.

The rather desultory way in which federation proceeded reflected the absence of compelling urgency. The colonies saw some advantage in removing tariff barriers to inter-colonial trade and commerce, having a greater strategic presence, and gaining access to investment capital at lower rates; individually, though, none of these represented a driving force. Taken together with the emergence for the first time of a distinct sense of Australian national identity, however, they were collectively sufficient. This lack of urgency was also reflected in their desire to create a minimally-centralised union.

In its design, Australia's federal system was modelled closely on the American federal system. This included: enumeration of the powers of parliament (s. 51) and not those of the States, with the States being assigned a broad 'residual' power instead (s. 108); a 'supremacy' clause (s. 109); strong bicameralism, with a Senate in which the States are equally represented notwithstanding great disparities in population (s. 7); the division of senators into different cohorts on alternating electoral cycles (s. 13); the establishment of a supreme court empowered to declare actions of either level of government unconstitutional, the High Court of Australia (s. 71); and a complex two-step amending procedure (s. 128).

Since federation, the balance of power between levels of government has shifted substantially from the founders' vision. The shift has transferred power from State governments to the Commonwealth government. While voters have generally rejected proposals to enhance the Commonwealth's authority through constitutional amendment, the High Court has obliged, with generous interpretation of the Commonwealth's enumerated powers. A major factor has been the way the Commonwealth government has monopolised access to the main revenue sources.

For the first two decades, Australian federalism stayed reasonably true to the "co-ordinate" vision of the framers. In co-ordinate federalism, the Commonwealth and the States were both financially and politically independent within their own spheres of responsibility. This was reinforced by the High Court, which in a number of decisions in those early years rejected Commonwealth government attempts to extend its authority into areas of State jurisdiction.