Cockatoo, originally named Cockatoo Creek, was first settled in the 1870s by gold prospectors and timber merchants.  In 1900, the narrow-gauge railway was built from Upper Ferntree Gully to Gembrook.  Cockatoo station was an important loading place for the timber and sawmills in the region.  From 1935, Italian farmers came to the area, growing potatoes, onions and strawberries in the rich red soil.  Again the railway was important in delivering produce, which was loaded at Cockatoo station.  The railway had closed by 1950s and in 1962 reopened as Puffing Billy Railway, which is still using the same narrow-gauge railway.

Cockatoo was one of the worst hit townships during the 1983 Ash Wednesday Bushfires, where over 300 buildings were destroyed and 6 lives lost. 

Cockatoo is now a residential town with has a full range of community services, social groups and sporting clubs for a population of over 4,000 residents, but has retained the charms of its bush setting.  Cockatoo has recently built a town centre garden square with the assistance of local government.

To the northwest of the town, within walking distance is the Wright Forest, a 161-hectare reserve and a fauna sanctuary, home to many animal species such as the brushtail possum and wombats and walking tracks