The man was shot multiple times and died at the scene.
The woman also suffered a gunshot wound to the leg, and stab wounds. Police administered first aid until the ambulance arrived at the scene.
She is in a serious but stable condition in Royal Perth Hospital.
Witness Mike Shumack, 28, said: "I heard a lot of yelling and then saw there was a guy dragging this girl around. When some more policemen showed up, he seemed to get a little more aggravated.
I heard shots firing. He took a while to go down. He got shot quite a few times, eight to ten times."
Nearby resident Masery Kamara, 26, said police were telling him to "let her go, let her go".
"He took the knife to the lady's neck. The police had no choice, they had to shoot him."
Mr O'Callaghan said the 38-year-old man who was shot dead was not known to the woman.
"The officers there were under a lot of pressure, obviously it's a complex situation, they have to make a decision in rapid circumstances," O'Callaghan said.
"It seems to me the police had to make a split-second decision.
"They can use their firearms when someone's life is in imminent danger.
"It's my belief they felt that was the case and they took action as they've been trained to take."
The Major Crime Squad is investigating the circumstances surrounding the fatal shooting, while the Internal Affairs Unit will examine the conduct of the officers involved.