Owen, an inventor from Wollongong, was 24 years old in July 1939 when he demonstrated his prototype .22 calibre "Machine Carbine" to Australian Army ordnance officers at Victoria Barracks in Sydney. The gun was rejected for two reasons. The first was because the Australian army, at the time, did not recognise the value of submachine guns. The second was the basic construction of the prototype was completely unsuited as a military weapon, especially as it lacked a proper trigger or any safety device, was of small calibre, and the "magazine" was effectively a giant revolver cylinder which could not be exchanged to reload. Following the outbreak of war, Owen joined the Australian Army as a private.
In September 1940, Owen's neighbour, Vincent Wardell, discovered Owen's prototype in a sugar bag. Wardell was manager of a large steel products factory at Port Kembla. He showed it to Owen's father who was distressed at his son’s carelessness, but explained the history of the weapon. Wardell was impressed by the simplicity of Owen's design. Wardell arranged to have Owen transferred to the Army Inventions Board, to re-commence work on the gun. The army continued to view the weapon in a negative light, but the government took an increasingly favourable view.
The prototype was equipped with a "magazine" which consisted of a steel ring drilled with holes for .22 cartridges, and this was revolved through the action using the power of a gramophone spring. This arrangement later gave way to a top-mounted box magazine. This better allowed shooting while prone.
The choice of calibre took some time to be settled. As large quantities of Colt .45 ACP cartridges were available, it was decided to adopt the Owen Gun for it. Official trials were organised, and the John Lysaght factory made three versions in 9×19mm, .38-200 and .45 ACP. Sten and Thompson submachine guns were used as benchmarks. As part of the testing, all of the guns were immersed in mud and covered with sand to simulate the harshest environments in which they would be used. The Owen was the only gun that still operated after the treatment. Although the test showed the Owen's capability, the army could not decide on a calibre, and it was only after intervention from the higher levels of government that the army ordered the 9×19mm variant.
During the gun's life, its reliability earned it the nickname "Digger's Darling" by Australian troops and it was rumoured to be highly favoured by US troops. General Douglas MacArthur proposed placing an order for some 45,000.