Saying "We don't want to outlaw encryption, we only want to outlaw strong encryption," is a bit like saying "We don't want to outlaw pregnancy, we only want to outlaw being more than 90% pregnant."
This law is extremely concerning but I don't see a way for it to be used against communications that are encrypted by a VPN, where that VPN is based outside Australia (most if not all VPN providers are). The Australian government has no power to compel a foreign company to do anything.