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Are people doing it? yes.
Is it illegal? yes.
Should you do it? I would say not worth the trouble right now... especially considering you need registered business in AU to even get the domains if available.
There are and have been quite a few adult .com.au domains in the past, but mostly hosted offshore.
The laws exist that make it illegal, just like it's illegal to buy and sell x rated porn in Australia, (aside from our territories... kinda like buying and selling fireworks in the US, usually in odd places on the freeway between major cities).
But here's the thing, people sell x rated porn all over the place in every capital city and people host x rated porn even on Australian servers (in the form of dating and submission sites mostly), even though it's illegal...
The argument has always been "who's going to police it"... I did hear that people like club x get hit by enforcement agencies all the time, but nothing ever comes of it.
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