To be honest, I don't think water is that big an issue in Australia. It's the use of water that is the issue. Australia was settled by the British, and so a lot of practice is based on the British agricultural model.
Saudi Arabia has a population of around 30 Million (more than Australia) when Australia has 3.6 times the land area. NSW alone would be able to handle a vastly larger population than the 7.5Million current population but it has a fairly large problem with the way things are currently handled.
It's exactly as bad as you think. It exemplifies just how racist the early Australian population was. I mean (akin to South Africa) how can you have a (fair) nation where policy gives rights to one part of the population and totally ignore the original inhabitants (as if they didn't exist)? It's a cruel and totally disgusting aspect of Australian history. That's not to say that it was any different from a similar treatment of aboriginal inhabitants of North America or any other colonial nation, but just because it was typical doesn't make it right. The fact that it only STARTED to be removed in 1949 and was totally stopped in 1973 is what disgusts me the most. When you consider that this bloke had loyalty to a country where a large chunk of the population wouldn't even sit down and have a beer with him...
<dismount soap box>
Firstly the rant. Australian Aborigines suffered from virgin field epidemics similar to the far more famous ones in the Americas, I'd suggest that this is a if not the major reason for the decline in their continent wide population from about 700,000 in 1788 to about 75,000 in 1925. I'd also suggest continuing population decline was a factor in the gradual development of the (subsequently much overhyped) doctrine of Terra Nullius. This has little to do with the Immigration Restriction Act, which was promulgated upon Federation in 1901, nor do the two combine to make a quasi Apartheid.
Secondly, you're dead right about the poor use of water, if Australia had been settled by the Portuguese or Spanish I doubt we'd have the water probems we see today.