In regards to how the filter will work, here is my understanding:

The public will complain about a site they deem to contain illegal content, but they will NOT get to vote. The Australian Communication Media Authority (ACMA) will decide whether it goes on the 'black list' or not. The black list will be a list of banned sites. The public however, will not be aware of what is on the black list. People from ACMA will decide if a site should on the black list, and we won't even know there was a trial.

The sites to be banned will contain illegal content, not necessarily horryifying sites. The problem is that mistakes can be made. A trial blacklist that was leaked, included a dentist's site and a school canteen website.

If you don't like a website, dont visit it. For people who want to visit an illegal site, they can easily bypass the filter. Is it worth spending tens of millions of dollars on? I think not.

Okay, I'm no expert on the subject (I doubt anyone here is) but here is my understanding:

The filter will be used to block anything illegal. If you can't see it at the movies or buy it in a store legally - it'll be blocked. This means that it won't be used to block horrifying or distasteful content as 'Julie603' suggested, unless it is illegal (and a lot of it isn't). Ofcourse there's always the possibility that the government will secretely scrap this idea and block whatever they want. As it currently stands, the main things targeted will be child abuse, bestiality, SOME violence and drugs, instructions on eauthansia and exploitative sexual fetishes.

If the filter were to stick to those, then it would be a brilliant idea in theory. The problem is it won't work. As 'NYVN' pointed out, the filter can be circumvented. There will be numerous ways of easily bypassing the filter.

In short, tens of millions of dollars will be spent on a filter whose only achievement will be to slow down the internet.