However, the real reason lay in the fact that Australian accountants for theatre chains realised that Australian product was much more expensive than the imported material from the U.S., which could be purchased cheaply as production expenses had already been recouped. To redress this decline, the federal government imposed a tax on imported film in 1914, but this was removed by 1918. No matter what the cause, by 1923 U.S. films dominated the Australian exhibition sector, with 94 percent of all films coming from that country.

During the 1970s an influx of government funding saw the development of a generation of directors and actors telling distinctively Australian stories. Films such as Picnic at Hanging Rock and Sunday, Too Far Away had an immediate international impact. The 1980s is regarded as perhaps a golden age of Australian cinema, with many successful films, from the dark science fiction of Mad Max to the blatantly commercial Aussie-bloke romantic comedy of Crocodile Dundee, a film that defined Australia in the eyes of many foreigners despite having remarkably little to do with the lifestyle of most Australians.

The industry has produced a number of successful actors and directors, including Cate Blanchett, Toni Collette, Nicole Kidman, Naomi Watts, Geoffrey Rush and Russell Crowe, directors Peter Weir, Mario Andreacchio and Baz Luhrmann, and associated production experts. However, in common with other English-speaking countries, Australia has often found it difficult to compete in a market place dominated by American product. The most successful actors and film-makers are usually easily lured by Hollywood and rarely return to the domestic film industry.

The indigenous film industry continues to produce a reasonable number of films each year, also many US producers have moved productions to Australian studios as they discover a pool of professional talent well below US costs. Studios established in Australia, like Fox Studios Australia and Warner Bros. Movie World, host large international productions like The Matrix and Star Wars II and III.

The Australian animated short film Harvie Krumpet also recently received an Academy Award.