Claim: Australia had the settlement of a penal colony.

New South Wales -LRB- abbreviated as NSW -RRB- is a state on the east coast of : Australia . It borders Queensland to the north , Victoria to the south , and South Australia to the west . It has a coast line with the Tasman Sea on its east side . The Australian Capital Territory is an enclave within the state . New South Wales ' state capital is Sydney , which is also Australia 's most populous city . , the estimated population of New South Wales was 7.5 million , making it Australia 's most populous state . Just under two-thirds of the state 's population , 4.67 million , live in the Greater Sydney area . Inhabitants of New South Wales are referred to as New South Welshmen .   The Colony of New South Wales was founded as a penal colony in 1788 . It originally comprised more than half of the Australian mainland with its western boundary set at 129th meridian east in 1825 . The colony also included the island territories of New Zealand , Van Diemen 's Land , Lord Howe Island , and Norfolk Island . During the 19th century , most of the colony 's area was detached to form separate British colonies that eventually became New Zealand and the various states and territories of Australia . However , the Swan River Colony has never been administered as part of New South Wales .   Lord Howe Island remains part of New South Wales , while Norfolk Island has become a federal territory , as have the areas now known as the Australian Capital Territory and the Jervis Bay Territory .