Whilst the presidential system of government and a comprehensive Bill of Rights in Australia were rejected, some of the federal features of the American system were used. These features include a high degree of autonomy for the government institutions of the federation and the states, a division of power between these organisations, and a judicial authority to determine whether either level of government had exceeded its powers.
Other aspects of the Constitution of Australia are associated with the federal principle. Original states have equal representation in the senate. Although this is not an essential element of federation, it reflects the view that states (colonies) should be equal in status.
Since federation the balance of power between levels of government has shifted from the founding father's vision. The shift has transferred power from State governments to the Commonwealth government. Phases in the development of Australian federalism can be identified.
The first phase may be described as co-ordinate federalism. In co-ordinate federalism the Commonwealth and the States were both financially and politically independent within their own spheres of responsibility.
A factor in the expansion of Commonwealth powers was the growth of defence expenditures which culminated in Australia's involvement in World War I. After the war, Conservative Commonwealth governments attempted to return to a system of co-ordinate federalism.
However, a system of co-operative federalism developed in the 1920s and 1930s in response to both internal and external pressures. Elements of cooperative federalism included: the establishment of the Australian Loan Council in response to intergovernmental competition in the loan markets; the co-ordination of economic management and budgetary policies during the Great Depression; and the establishment of joint consultative bodies, usually in the form of ministerial councils.
Tax competition after the start of World War II ended this period of intergovernment co-operation. The constitutional framework on tax allowed both the Commonwealth and states to levy taxes. However, in 1942 the Commonwealth introduced legislation to give it a monopoly on income taxes. It did this by providing financial grants to states (using the section 96 grants power), on the condition that they did not collect their own income taxes. The validity of this scheme was upheld twice in the High Court. Uniform income taxation levied by the Commonwealth became the principal instrument of Commonwealth financial domination and vertical imbalance in the Australian federal system (vertical fiscal imbalance). The system allowed the Commonwealth to intrude into traditional fields of State responsibility by means of specific purpose grants or loans to the States for purposes such as education, health and transport. Commonwealth-State relations were at an all-time low as in 1975, when the States sought to resist the growing Commonwealth involvement in local and regional affairs.
Following the defeat of the Whitlam government in 1975, Prime Minister Malcolm Fraser put into effect a new policy of co-ordinative federalism. The outcome was an agreement between the Commonwealth and the States in which both levels of government agreed to a system of co-operative planning and decision making.
Despite the centralisation of legislative and financial power, there are many areas where federal Parliament lacks the power to regulate comprehensively, even where such regulation might be seen to be in the national interest. This has led State and federal governments to co-operate to create regulatory regimes in fields such as the marketing of agricultural products and competition policy.
The place of the Australian Territories within the federal system has been controversial. The power to "make laws for the government" of the Territories, assigned to the Commonwealth Parliament by s 122 of the Constitution, is not confined by any words of limitation. It is generally assumed to be a plenary power, equivalent to the "peace, order and good government" powers of self-government assigned to the States by their own Constitution Acts.
However, the Constitution makes almost no provisions as to the role of the territories within the federation. For example, the Senate was to be composed of equal numbers of Senators from each state. A particularly troublesome matter was whether this excluded territories from participation in the Senate. The issue has now been settled with two seats for each of the mainland territories, the Northern Territory and the Australian Capital Territory, while each of the states has twelve. Two of the three inhabited external territories, namely Christmas Island and Cocos (Keeling) Islands, are represented by the senators and representatives of the Northern Territory. Norfolk Island, however, has no representatives in the Senate or the House of Representatives, as it has a higher degree of autonomy than any other part of Australia.