What they are really saying is our revenue management team stuffed up and under estimated demand for NYE for some reason and we are fully booked already. We are now reviewing bookings that were made at a cheap rate and attempting a try-on to see if anyone will bite and let us jack up the price.
The "free night subject to availability anywhere in the next 12 months" is a real con - they want you to cancel so that they can resell the room for $700 more than the currnet booking - and they are offering something worth about half that.
I would suspect that they know (or soon will) that they don't have a leg to stand on under ACL, and are just hoping they don't get called, but will honour the bookings for those that stand firm. The NSW Consumer Affairs link that
@MEL_Traveller provided includes a specific example of a right to compensation: