Both pilots were conducting solo navigation exercises for the removal of the area restriction from their Private Pilot Licences. The pilot of VH-JGG, following a brief refuelling stop at Mudgee, took off from runway 04 and climbed to circuit height prior to setting heading from the downwind leg. At about the same time, VH-DAF entered the downwind leg for runway 04, after approaching the circuit area from the west. Both pilots made the required radio calls but possibly may not have heard each other due to preoccupation with their respective arrival and DEPARTURE procedures. An eye-witness reported seeing one aircraft being overtaken by a second aircraft which appeared to be taking evasive action. The right wing of the overtaking aircraft struck the left wing of the leading aircraft. The overtaking aircraft, which was subsequently identified as VH-DAF, lost its right wing in the collision and spun to the ground about two kilometres northwest of the aerodrome. The other aircraft was landed successfully in a paddock about two kilometres southeast of the aerodrome, despite extensive damage to the left wing which rendered aileron and flap systems inoperative and airspeed indications unreliable. At the time of accident the weather was fine with scattered cloud at 4000 feet and visibility in excess of 10 kilometres.