An Australian police officer fought back tears in court as she described the moment she saw a three-year-old girl in her cot with "her whole head on fire".

The girl's father, Edward John Herbert, allegedly told his neighbour he burnt his daughter at their Perth home because she was "too beautiful".

The man is on trial in the Western Australian Supreme Court accused of setting alight his daughter and dousing her autistic seven-year-old sister with petrol at Doubleview, in Perth's north, in August 2015.

Herbert admits his intention to kill, but has pleaded not guilty to five charges on account of being unsound of mind.

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Constable Stephanie Bochorsky was off-duty at the time and watching television at her neighbouring home when she heard an altercation between Herbert and his partner.

The constable told the court on Monday that when she asked the woman if she was OK, she replied: "No, he's setting the kids on fire!"

Const Bochorsky ran into the house and smelt petrol before spotting the toddler.

"Her whole head was on fire," she said, as she took a moment to compose herself.

The officer explained how she covered the girl in a blanket to put out the flames, then witnessed Herbert pouring petrol over the older child in her bed.

Const Bochorsky told Herbert to get away from the children, but he did not respond and remained standing there.

"My main concern was to get the flames extinguished," she said.

The policewoman dragged the older girl out of the bed and bolted out of the house.

Prosecutor Amanda Forrester said in her opening address of the judge-alone trial that the three-year-old was permanently scarred from the life-threatening injuries she suffered to 13 per cent of her body.

Ms Forrester said Herbert was a cannabis user and drinker who was behaving strangely in the lead up to the incident, with his mood swinging from happiness to rage.

His partner said in her court statement that before the attack he seemed to be talking to himself and she was scared.

"I was trying to keep him calm as I was in fear for my life," she said.

She said at one point that night he told her: "The werewolf is coming at 12 o'clock."

Later, he said: "That's it bitch, I'm going to kill you."

He then told her he would burn the children instead.

The woman said when she saw her burnt daughter she could "smell burning flesh" and the girl appeared to be in shock, screaming and crying.

A neighbour said in his statement that when he rushed into the house with a fire extinguisher after the girls had been rescued, he found Herbert drinking beer in the kitchen.

When he confronted Herbert, he allegedly replied: "They're my kids to do whatever the f*** I want."

Herbert also told the neighbour he burnt his daughter because she was "too beautiful".

He then allegedly lunged at the neighbour with a knife, but the man hit him on the head with the fire extinguisher.

The trial continues.