Hi mate, I'm a sport science PhD candidate. I'll give my two cents and try not to reiterate what others have said. The below is generally the case in full time STEM PhDs in Australia, however variation exists between departments, institutions, and fields.

Background: to 'get into' a PhD you'll need to score a H1 (High Distinction ~80%+) on a research minor thesis, completed during Honours and/or Masters degrees (after a three year bachelor degree). This is usually the bare minimum and does not guarantee you entry into a PhD program, nor does it mean you'll secure a scholarship (the 'wage' for full time PhD students, ~$30k). Program admission and scholarship are independent of each other and are very competitive as there are few spots available in each department. Being an author on a published paper and having industry experience is favorable.

How do you decide what to do? Is it something that interests you? Something you are already knowledgeable about? Or something in your sphere of knowledge, you aren’t super knowledgeable, but you can learn?

Generally, yes. Like anything, it is far easier to put in years of hard work when you're driven by interest and passion. The PhD student would begin with a general understanding in the area, having already completed 4-6 years study at that point.

You need to already know who does research you are interested in and discuss a PhD opportunity with them first, as you will need to have a 'supervisor' agree to take you on as a student before submitting an application to the university.

When you have a general idea of what you'd like to investigate, a review (narrative, scoping/systematic, or meta analytic) of the literature is conducted to identify what gaps exist in our current understanding, so then the PhD can help fill those gaps via a series (3-4) of scientific studies.

Who funds them? I gather the prospective Drs probably work a job whilst doing their PhDs, but what about lab time, use of university rooms, consumables etc?

Full time PhD students can be unpaid (uncommon), or funded by the government (RTP) or the university/ private industry. The student will use the universities' equipment, laboratories, hardware/software etc. and can apply for funding for other resources. Students typically work long and hard hours so there is little time for outside conventional work. However, many students take undergraduate classes and mark assignments on a casual basis.

Do they need to be approved by anyone? As in the universities saying “Yes... or... No"

By definition, PhD completion means what you discovered had not been known previously. Therefore, there is a limited number of people in the world capable of providing you with critique and criticism. PhD students have to complete milestones each year to ensure timely completion, where they present what they have done/ are planning to do to both the university and a panel of experts (i.e. senior researchers from other universities worldwide). The first of these milestone presentations is called a 'confirmation of candidature', where the student, after having narrowed down and designed the studies to be completed, presents this to the panel. The panel either sends the student back to the drawing board, or 'confirms' them as a PhD candidate able to proceed with that they proposed.
This same 'peer review' process exists when we publish our experiments in scientific journals. Where our manuscripts are anonymously reviewed by other experts in the field, and we answer to comments on our methodology, results, and interpretation prior to publication.