What it does
The Australia Act 1986 is the legislative instrument that severed the final constitutional links between the United Kingdom and Australia, giving effect to the sovereign status the Commonwealth had already achieved in practice. Section 1 is the centrepiece: it provides that no Act of the Parliament of the United Kingdom passed after commencement shall extend, or be deemed to extend, to the Commonwealth, to a State or to a Territory as part of the law of any of them. This is a complete termination of imperial legislative power.
Sections 2 and 3 then enlarge and clarify the legislative competence of state parliaments. Section 2(1) declares that each state parliament has full power to make laws for the peace, order and good government of that State with extra-territorial operation. Section 2(2) adds that state parliaments possess all legislative powers the United Kingdom Parliament might have exercised before commencement, subject to an express carve-out preserving the pre-existing limits on a State's capacity to engage in relations with countries outside Australia. Section 3(1) disapplies the Colonial Laws Validity Act 1865 to post-commencement state laws, while section 3(2) abolishes the doctrine of repugnancy, allowing state parliaments to repeal or amend any UK Act, order, rule or regulation in so far as it forms part of the law of the State.
Section 4 repeals sections 735 and 736 of the Merchant Shipping Act 1894 in so far as they form part of state law, removing archaic British controls over state shipping legislation. Section 5 is a critical savings provision: it subordinates the expansions in sections 2 and 3(2) to the Commonwealth of Australia Constitution Act, the Constitution of the Commonwealth, and the Statute of Westminster 1931 as amended. It further provides that nothing in those sections gives force to any state Act that would repeal, amend or be repugnant to the Australia Act itself, the Constitution Act, the Constitution or the Statute of Westminster.