". . . the government is determined to step into the policy gap left by the iiNet case, and if need be, we will legislate."
Two problems immediately jump to mind. First, the government is "determined", which is to say that they don't actually care what their citizens want - they have made up their mind and if ISPs don't tow the line voluntarily, the government will force them.
Second is that the government assumes there is a "policy gap". They have already decided that the system needs fixing and they are dirtying up their boots to come tramping in.
The only question, really, is which came first: the determination for a "solution" or the identification of the "problem"? Both are equally flawed so it doesn't really matter but, for what it's worth, I suspect the solution came first.