The Australian Defence Forces use the Steyr AUG instead of the M4 because Australia has obtained a license from Steyr to build the AUG to their own specification (as the F88 Austeyr and now the F90). Colt would not let Australia obtain a license from them to build the M16A2, M4, or any other AR-15/M16 derivative. It also helped the extensive evaluation of the Steyr AUG vs M16A2 assault rifle in 1985.
The F88 Austeyr assault rifle is the Australian Defence Forces (ADF) standard individual weapon.
When the Australian military decided to replace the 7.62mm L1A1 SLR with a more modern combat rifle, it was decided to follow along with allied nations and choose a combat rifle chambered for 5.56 mm. During the selection phase, of all the rifles in testing, there was a strong preference for the M16A2 by many factions within Australia and the rumor was that the M16A2 was actually the preferred choice.
However, at that time Colt had suffered a serious setback when it lost out to FN of Belgium for the manufacture & supply of M16A2 rifles to the US military. Colt reacted to this by stating that if Australia wanted the M16A2, we would have to buy it from Colt. However, the Australian government has long maintained the need for local production (for the sake of self-sufficiency in small arms supply) and decided if Colt was not willing to let us build it locally, we would select another manufacturer that would let us make it locally.
Extensive evaluation of the Steyr AUG vs M16A2
Because, in 1985, the Australian Army did an extensive evaluation of the Steyr AUG A1 against the M16A2, and it won easily. In fact, there is a scanned copy of the original evaluation available online here. It concluded that “The results clearly demonstrated that from an engineering viewpoint the performance of the STEYR was significantly superior to the COLT in most respects; particularly in terms of endurance and adverse conditions.
The STEYR AUG A1 is recommended as the system most closely satisfying the requirements of ASR 48.8, and is considered suitable for introduction into service without modification.”
It replaced the L1A1 and M16A1 in service.
Other assault rifles in Australian Defence Forces
However, the Australian military does use M4 and various AR variants (e.g. HK416) as well. Some Australian units in Iraq in 2006 were equipped with M4s, not Steyr (although there were plenty of those as well, for example, Australian protective details carried 9mm AUGs).
The Australian SASR and Special Forces refuse to use the Steyr and use the M4 instead. They say the gun is too difficult to use when wearing body armor, takes too long to reload under stress, and is too fragile for intense combat.
I have used the SLR, the M16A1, M16A2, F88, M14, L85A1, and L2A1 AR (only listing the rifles as the other weapons aren’t really relevant to the question) in my time in the Australian Army Reserve and like anything in life, all of them have their strengths and weaknesses.
The only one I would not have recommended at the time was the A1 version of the L85 and only because they had not ironed out all the teething problems (I would have no such concerns with the L85A2 however). Personally, I had no problems with the F88 Austeyr and was happy enough to carry it but I dearly love the SLR and would have been more than happy to continue using it (and be “old school”!)