A lot of people here seem to read too many comics and watch too much TV.
Whenever military or para-military teams (eg NSW police tactical response) are sent into a siege situation there is a high risk of innocent people being killed or injured. That's why they stayed back while the trained negotiators worked to have the hostage-taker surrender. The effort of the police action was to bring the incident to a peaceful conclusion with safety for the hostages.
The police para-military team only went in after shots were fired inside. Information is sketchy on what actually happened, but there are reports that after the hostage-taker started nodding off to sleep one of the hostages tried to disarm him. He awoke and fired his gun. There are standing orders for the para-military outside to go in if the hostages are in immediate peril, and gun fire from within is more than enough to trigger such a response.
It is probable, as it always is in these situations, that hostages have been killed or injured by the para-military that went in to save them. Its impossible to discharge a weapon amongst a crowd of people inside a concrete box without the potential for innocent people to be hurt. There is simply no time to pause and think. That's exactly why armed intervention is and should always be your very, very last response, not your first.
As for those saying the SAS or other army unit be deployed, you need to understand they are the least capable force in this situation.
The police in all states have para-military units that, in big cities like Melbourne and Sydney, are frequently called out to potential siege/hostage situations. They happen all the time (but get less publicity than when Islam is involved, however loosely). As a result police para-military forces are the most experienced and best trained for this sort of situation. They know the lie of the land and are just part of a bigger (unseen) team of negotiators, electronic experts (eavesdropping on the building) and a command and control structure. They all train together and work together in real life situations on a regular basis. Their aim is to minimise bloodshed and arrest the offender and bring the person to justice. Not so the army.
The fed govt military units are, quite simply, very highly trained killers. Negotiation is not their strong point (witness the killing of bin Laden by US Seals - they did not go in to negotiate surrender). Army units have almost no experience in real, live fire urban sieges within Australia. They have experience overseas, buts its a lot different here than shooting up a village in Afghanistan where the media aren't filming.
For those who think maybe the police botched the raid, well, if hurting the innocent is a botch so be it. But innocents will always get hurt when police or army go in with guns. I fully endorse the main intent of the police to bring about a negotiated settlement.
Some people might also be disillusioned by the obviously nervy and jumpy behaviour of the police as they went in. But this real life, not Die Hard the movie. This is how real people, even highly trained police or army, act in real, life-threatening situations.
Reality is stranger than fiction.