WnWS\RWS is about the same driving time from Sydney Airport as Six Flags Magic Mountain is from LAX. Wonderland saw regular tourist coaches visiting for day trips, and Scenic World Katoomba - more than twice the driving time - regularly attracts bus tours, day trips and so on. Distance is not a factor - although it would have been wise to push on with a second (dry) gate to make the spot a destination.
The fact it was sold to another company doesn't immediately illustrate it as a failure (the fact it was purchased indicates someone thought it had success potential, and village was over leveraged and under capitalised at the time - they needed to free up their bank balance - hence why they sold their oxenford land, WnWS, leased rivals, engaged with buyout offers, etc etc.).
The Sydney market has great capacity to sustain theme parks. Wonderland operated for 19 years. Luna Park has had several incarnations and is in the midst of transforming into a new, modern era. Heck, Disney has explored Sydney as an option numerous times, and got really close to breaking ground once too (check out Disney Wharf on YouTube).
Your claims WnWS wasn't financially viable don't make out - otherwise Palace wouldn't have purchased and continued to operate it. Villages problems weren't because of WnWS, but they did exacerbate it. Village went into the sydney market with the wrong attitude. They tried to introduce things we'd never seen at the gold coast parks - like RFID bands, paid parking etc - AND they cut costs on everything. Go and look at the concepts for WnW Aussie World, go and find the original WnWS plans, and then look at the concrete jungle we ended up with. The place just wasn't a nice place to visit. And the tower designs - fitting as many slides as they could on one tower - meant queueing was a disaster.
Couple that with Village's launch plans - the failed New Years' Eve party in its first season fell devastatingly short of a professional operation, and this immediately soured many local's opinions.
If Covid hadn't have come along, I feel strongly we'd have seen early whispers of Palace \ Parques exploring second gate options. Covid has now stuck a pin in that, so it's probably going to be a long time before we see additional development - but that still doesn't point to failure, as the park still continues to operate.
Sydney's poor performance with theme parks stems from poor operators, rather than a poor geographical location. You could stick a halfway decent operator in Lithgow, and it'd still be popular. The problem is most definitely not the location or the population.