How does CASA and Air Services decide whether an airport has a Control Tower?

[Traffic_Is_Er_Was]

The key is to allow some market forces into the equation and get rid of this silly idea that only the Federal Government can be trusted to provide safe air traffic control.

In just about every country in the world, the government in some shape or form provides ATC. There are private contract ATC in a lot of smaller towers in the USA, but even then the FAA has it's fingers pretty deep in that pie, ie it pays the contractor to provide ATC at that location on its behalf as long as the cost/benefits continue to stack up. If the FAA needs to save money, TWRs get closed. Not many (if any) municipalities take over running and manning them (if they are even allowed to) in the land of the free if the government stops paying. What makes you think local councils in Australia will? They do not even want to provide a UNICOM.

[Mr Approach]

You are correct Traffic, but the major difference is cost recovery, not cost/benefit.
The US and others are more concerned with providing the services where they are needed, and then working out how they can be provided at a reasonable cost.

• The US does as you describe but does not pass on it's bureaucratic costs to the VFR towers, or insist on using Government employed ATCs. Hence over 60% of the VFR Towers are staffed by retired FAA ATCs on much lower wages than they were getting from the Government.
• Canada has a not-for-profit Civil ATC organisation, so users know they are paying only what it costs to provide a service. Any windfall surplus is returned to industry.
• The UK has about 160 ANSPs, all providing services in a contracted system where market forces operate. (Gatwick even employs a German company to provide it's Tower and Approach - but I'm not sure that will survive Brexit!)

Australia, on the other hand, has a Government-mandated cost recovery system. Government agencies such as Airservices and CASA are required to charge their customers to recover costs. Airservices charges by the weight of an aircraft, as if that had anything to do with the cost of providing ATC, and CASA charges $190 per hour, which is way beyond what they pay anybody.
Whether the Minister will admit to it or not, (and it is all under the Government's control) this type of regime, in order to fulfill the Government mandate, has to organise itself around where the most money can be extracted. In Airservices case this is over the oceans, the upper flight levels and major terminal areas. With CASA it means dumping all responsibility for GA onto 'self-managing" entities such as RAus and the Glider Federation, while concentrating on AOCs and the big end of aviation. (Yes - I know about the Chicago Convention)

Either the US or UK model would work fine in Australia and indeed, about 20 years ago, the Coalition started down that road of divesting Airservices (that is itself) of aerodrome ATC and Fire Services. There were many vested interests that stopped the process, however then air traffic at our non-controlled airports had not increased to current (non-COVID) levels so there was breathing space.
The mid-air at Mangalore is what, in the safety business, is called a leading indicator, or if you like a warning. Do nothing and it will inevitably happen again.

[Traffic_Is_Er_Was]

But Mangalore wasn't even busy at the time. It was 2 IFR light aircraft (who were told about each other) at an uncontrolled aerodrome. It could have happened at any uncontrolled aerodrome in Australia. What are you going to do, put TWRs at them all?

[Mr Approach]

No Traffic - In Australia, that would be a waste of resources.
However ICAO requires that instrument approaches are contained within controlled airspace - another Australian non-compliance. Here we require that they be contained in the same category of airspace, but, CASA hands out exemptions all over the place, particularly for NDB approaches.

• A crazy example exists at Toowoomba where there is an RNaV approach that flies near Oakey. When the Army Tower is open it cannot be used!

In Europe an instrument approach can only be used when a tower is operating, that is the reason behind their push for remote Towers.
In the USA Class E airspace with a CTAF for VFR traffic is used. Whatever your views about Class E, ICAO considers it to be controlled airspace, so it meets the international criteria. The US system is far more applicable to Australia than the European.
So Class E, controlled from Melbourne Centre by en-route controllers, would have provided separation of the two IFR training aircraft. Instead the same Melbourne controllers with Class G have their work cut out, giving traffic information, listening to what the pilots do next, re-evaluating the traffic information and re-issuing it, and so on....
Believe me it is sometimes much easier to separate than provide ever changing traffic information. (PS. That is also why Class D Tower ATCs sometimes "over separate" VFR aircraft, it is quicker and easier than passing traffic information)
I hope that answers your question.