The Melbourne race introduced two procedural changes that would endure in Formula One. The old red-to-green light system for race starts was replaced by the new five-light arrangement still in use today: five red lights illuminate at one-second intervals after the last driver reaches his grid box, hold for a pre-determined pause, then extinguish simultaneously. Additionally, the Friday qualifying session was dropped, leaving a single session on Saturday afternoon as the format going forward.
The 107% qualifying rule made its race debut here. Any car that failed to set a lap time within 107% of the pole position time — 1:38.837 on this occasion — was excluded from the race as an unacceptable safety hazard. Both Forti cars failed to meet the threshold and were barred from starting, despite the team having achieved its best-ever result of seventh place at the immediately preceding 1995 Australian Grand Prix in Adelaide.
In the driver market, Taki Inoue was originally scheduled to race for Minardi as a pay driver, but when funding failed to materialise before the race he was replaced by Giancarlo Fisichella, in whom Marlboro had expressed interest.
Jacques Villeneuve, the reigning IndyCar champion making his Formula One debut, claimed pole position ahead of his Williams teammate Damon Hill. The second row was shared by the two Ferraris, with Eddie Irvine qualifying ahead of Michael Schumacher.
The opening start was disrupted before it could produce any racing. Pedro Lamy began from the pit lane due to a clutch problem, and Heinz-Harald Frentzen stopped on the formation lap with an electrical fault. When the lights went out, both Tyrrell cars stalled on the grid, meaning only 16 cars got away cleanly. Hill slid wide at the first corner, conceding positions to Irvine and Schumacher. Approaching the third corner, heavy braking produced a chain reaction: David Coulthard veered left and his McLaren struck Johnny Herbert's Sauber. Martin Brundle, unable to slow in time, hit the rear of both cars and was launched into a barrel roll, his Jordan breaking in two as it landed in the sand trap. Brundle was unhurt. The race was stopped to clear the wreckage.
The restart operated under regulations that declared the first start null and void. Herbert did not take the restart, his teammate Frentzen having taken the spare Sauber; Herbert is classified as a non-starter in the official results. Brundle took the restart from the pit lane in a spare Jordan but spun off on lap 2 after contact with Pedro Diniz.
Williams dominated the second start. Villeneuve led Hill, while Schumacher moved into third before a slow second pit stop dropped him back. He developed brake problems on lap 28 and retired five laps later. Irvine moved into third, having survived contact with Jean Alesi's Benetton on lap 6. Williams ran a one-stop strategy; Hill emerged from his stop narrowly ahead of Villeneuve, who immediately reclaimed the lead. Shortly after, Villeneuve had an excursion at the first corner and then developed an oil leak. As his oil pressure fell, the Williams pit wall showed a SLOW signal. Hill closed the gap and passed his teammate in the final laps, taking his 14th Grand Prix victory — equalling his father Graham Hill's career win total. Villeneuve finished second, Irvine third on his Ferrari debut.
The result gave Hill back-to-back Australian Grand Prix victories, his previous win having come at the 1995 season finale in Adelaide.