because "its" refers to the country Australia ?! "in the country and its surrounding islands"

The possessive form of "it" is "its," without an apostrophe. (A common mistake made even by native speakers is to put in an apostrophe, which is wrong.) "Its" means "belonging to it," and "it" here means "Australia." Here is what the sentence means, and how it is shortened by using a pronoun. Kangaroos are found in the wild only in Australia and Australia's surrounding islands. Kangaroos are found in the wild only in Australia and its surrounding islands.

“Its” is “Australia’s” in this sentence.