John McCormack secured pole position with a time of 1:00.9 driving a McLaren M23. He shared the front row with New Zealander Graham McRae, who entered his self-designed McRae GM3. McRae’s car featured a unique clear perspex cockpit cover that allowed spectators to see the driver at work. Vern Schuppan, driving an Elfin MR8 for Ansett Team Elfin, qualified third with a time identical to McRae's. The top five was completed by the Lolas of Alan Hamilton and Jon Davison.
Before the race began, McCormack’s crew discovered a blown head gasket during the warm-up session, which had damaged the cylinder heads of the 5.0L Leyland engine. Due to time constraints, the heads could not be replaced, and McCormack started the race with the engine's reliability in doubt. Ian Adams did not participate in practice but was permitted to start his Lola T330 from the back of the grid.
Graham McRae won the start and led the race for its duration. His victory was marked by two significant incidents: a spin at the Dandenong Road corner (Turn 7) on lap 32 and a "bad sportsmanship" flag issued by officials. The flag was a result of McRae failing to slow sufficiently during a yellow flag period following a crash by Garrie Cooper on lap 22. While other drivers slowed, McRae maintained his pace, extending his lead over Jon Davison and Vern Schuppan by more than half the length of the 1 km front straight. McRae later slowed at the start/finish line to seek confirmation regarding the flag but remained in the lead.
The race saw early retirements from major contenders. Alfredo Costanzo retired on lap 5 after losing second gear in Kevin Bartlett’s spare Lola T400B. On lap 6, pole-sitter John McCormack retired from third place when his McLaren suffered the anticipated head gasket failure.
McRae completed the 49-lap race two laps ahead of the field, setting the fastest lap of 1:01.9 at an average speed of 180.29 km/h. John Briggs finished in second place driving an older Matich A51 Repco-Holden, while Peter Edwards took third in a Lola T332.
The event was characterized by several high-speed accidents that resulted in hospitalizations. On lap 22, Garrie Cooper suffered a 250 km/h crash at Rothmans Rise on the back straight. His Elfin MR8 was destroyed after "something broke," sending the car into the fence separating the circuit from the horse track. Cooper sustained broken ribs and a badly broken leg.
Five laps later, the remaining Ansett Team Elfin car of Vern Schuppan was involved in a collision at Turn 1 with Jon Davison, who was running in second place in an ex-Alan Jones Lola T332. Both cars suffered heavy damage; Schuppan retired immediately, and Davison retired moments later at Holden Corner.
With three laps remaining, Alan Hamilton suffered a severe accident when his Lola T430 struck the base of the Dunlop Bridge at the high-speed causeway. The impact tore the car in two, leaving Hamilton exposed at the front of the chassis while still strapped to his seat. Hamilton was rendered unconscious and suffered minor head injuries and broken bones, though he eventually made a full recovery.
Graham McRae’s victory earned him the Lex Davison Trophy. The race was completed with a winner's average speed of 172.76 km/h. The gap between the winner and the rest of the field was significant, with the second-place finisher being two laps down at the conclusion of the 49 laps.
Following the Grand Prix, a three-lap demonstration race was held featuring historic machinery and world-renowned drivers. The participants included five-time World Champion Juan Manuel Fangio, three-time World Champion Jack Brabham, Bob Jane, and Bill Patterson.
Fangio, aged 67, drove the Mercedes-Benz W196 he used during the 1954 and 1955 seasons. Although he had not raced competitively for 20 years, he still held a full FIA Super Licence. Fangio initially intended to drive in a T-shirt, as per his original racing era, but was required to wear modern white overalls to comply with safety regulations regarding uncovered body parts. He was permitted to use his original goggles and Herbie Johnson helmet.
Jack Brabham drove the Repco-Brabham BT19 in which he won the 1966 World Championship. Brabham "won" the demonstration after several lead changes with Fangio. Brabham’s fastest lap of 1:21.6 was nearly 20 seconds slower than the Grand Prix pace and 17 seconds slower than the circuit's Tasman Series lap record, reflecting the exhibition nature of the run. During the trophy presentation, McRae stated that meeting Fangio was a greater honor than winning his third Australian Grand Prix.