Having a by-law that prevents a lot owner or occupier from using a lot in an unlawful way is not “enforcing”Council regulations, it is applying those regulations to the strata scheme.
There are heaps of examples of non-government organisations doing this – the Law Society can strike off a solicitor who commits a crime. The common law has long recognised that a person can sue for damages if another person breaches a statutory duty.
By-laws should be consistent with the law. It is when they conflict with it, there is a problem.
If the department is correct, the whole penalty system for by-law breaches is invalid.