I think just go with either Australia, whichever capital city is appropriate for the state, or even both.
We don't get that many posts that further separation is worthwhile IMO, that's a pathway to ending up with a bunch of communities that appear dead from lack of activity (which can be a bit of a self fulfilling prophecy - people only tend to post in places that seem alive). I think we've already fragmented discussion more than is ideal between splitting off news/politics/questions/environment/memes from the general Australia community, regional interests are more understandable but the existing city/state comms are already quiet enough with our current userbase.