So I wanna start a game where the players are in this Australia styled prison island. What actions and starts for creation should I as a dm set up to make this beginning a challenge while not ripping away freedom, creativity, and agency.

I would recommend running this in a way similar to when the main characters are imprisoned in Guardians of the Galaxy. The players can decide whether or not their characters knew each other before being put in jail (or even if they worked together to commit the same crime), and then they all have to find a way to escape together.

How australia style do you mean? Australia wasn't exactly hyper secure prison... It was more like a colony where most of the people were just forced to live there against their will, and they basically had to work together or starve to death in an unfamiliar, dangerous wilderness

ok lets start with austrilenn style in the since that's its cant be easily escaped and the area is deadly if traversed alone or without a knowing guide. i also neglected to put that there are "jobs" in the since that the empire sends over expendable, or well protected people to high scouts, diggers, and other things to explore and excavate lost ruins. 

seconds i want to strip them of all gear, and force them to scavenge, hustle, and survive. thing the firtst island in divinty orignal sin 2

That makes sense to me. I think one thing that would be smart to do is establish early on that, if they choose to just say "screw it" and sneak out of the prison colony, there are some serious dangers not far out of town that would give them a much more intense challenge much earlier on than they should be able to handle. Maybe have someone better equipped rescue them and drag them back into town just in case.

I think it would make sense to start with their arrival... so the characters and players are both introduced to all the details of this new setting at the same time. I'd say set up at least 5 different career paths for the players to focus on when not adventuring. Stuff like construction, farming, exploring, even just working in a tavern. Although, if you don't mind railroading the characters a bit more, I think just all of them getting assigned the excavation teams right off the bat would give you a solid excuse to set them on adventures quickly and easily without having to explain why they're being allowed to go on adventures as theoretic prisoners.

Stripping players of all their gear is often a lot more fun on paper than it actually plays.

Quote from TimCurtin >>

Stripping players of all their gear is often a lot more fun on paper than it actually plays.

 Well, they seem to be planning this as the start of a campaign, so it's less like taking away all of their gear and more like just not giving them gear in the first place. I feel like starting at nothing is a lot less frustrating than starting with something and having it taken away.

Quote from koopanerd >>

So I wanna start a game where the players are in this Australia styled prison island. What actions and starts for creation should I as a dm set up to make this beginning a challenge while not ripping away freedom, creativity, and agency.

 Your first action, IMO, should be to inform your players of what you have in mind. Assuming° they're ok with such a campaign, they should at least get to create characters that aren't completely clueless about fending for themselves. 
The second action should arguably be figuring out how you're going to make these challenges interesting. Exploration and survival mechanics are by themselves not very engaging in D&D - they tend to just come down to rolling and either being successful or not. What do you expect/hope the players will do? Do you have mechanics in mind for those things? What happens when they succeed, what when they fail? Etc. 

°I'm only assuming this for the purpose of this post, because otherwise there's no point to it in the first place. Do check if it's the sort of thing they want to play. If not, don't just force it on them anyway.