I think the way it is worded in the Constitution is that the Commonwealth Government (i.e national government) can't make laws enforcing/restricting a religion. I.e can't ban/mandate a religion Australia wide. But where it falls down is there is nothing stopping the individual States from doing so (i.e New South Wales, Victoria, Queensland etc could make state laws banning religions).

I think that is one of the main problems with our constitution the states have a heap of power. I believe it is due to the history of federation where the six states came together to form Australia. There was a bunch of compromises required to get everyone on board, which is why you have things like Tasmania having the same number of Senators as NSW despite the huge disparity in total population.

Because of all the state provisions it is very difficult to make changes to the constitution. It requires a referendum with an overall national majority and a majority of all the states is also needed. That's why borderline referendums never seem to pass only the ones that are overwhelming supported ever get up (depending on your pov this is a feature not a bug).

Yes establishing a state religion is a power retained by the states. The states were independent countries before federation and so they retain a great deal of power.

In practice this is not something that we have to worry about here in Australia. The high court has rule in a few case an implied right to freedom of religion in the constitution in much the same way they have done so for freedom of speech - although freedom of speech seems to be under far more attack of late here.

This is exactly how the American constitution worked originally, as well, and for all the same reasons. Many things in it are compromises, and the Federalist Papers say as much in some of the rationales.