New South Wales was founded ( begun ) in 1788 , by the British who set up a small colony which became known as Sydney Town , and grew into the city of Sydney . The British colony of New South Wales originally included more than half of the Australian mainland , as well as New Zealand , Lord Howe Island and Norfolk Island . The colony of New South Wales was founded in 1788 and originally comprised much of the Australian mainland , as well as Van Diemen 's Land , Lord Howe Island and Norfolk Island in addition to the area currently referred to as the state of New South Wales , which was formed during Federation in 1901 .