I love stuff like this
I can share some experience, but be aware that I am in the NT and our planning scheme is different to yours (although strangely, we also have these ridiculous arbitrary 5m x 5m POS arbitrary standards)
The first thing I would do is have a chat to your local planner (not the per hour private planner, I mean council) and ask them of any similar cases. If you're really polite and pay for photocopying, you might even get a copy of the submissions lodged by other people previously, as well as the outcome achieved. I was fortunate enough to receive copies of all successful applications city wide, and based my strategy around those.
Now, there are a few ways to get around your problems.
In regards to the 5m x 5m open space issue, we can all agree that this is an arbitrary figure. If you look at the planning scheme section that contains that clause, it will have a heading that outlines the purpose of that clause. Generally the heading will sound like this:
Section 5 - Private Open Space The purpose of this clause is to ensure that all dwellings in land zoned XX have allocated to them enough private open space so as to allow sufficient space for recreational activities, will contribute to a safe environment for children at play, are of an appropriate size to allow for (insert whatever crap the idiots who wrote the planning scheme dropped in here to sound important)
So what you have to do is take the subclause that says "must include an area not less than 5m by 5m" and then demonstrate that whatever design you come up with in subdivision actually achieves the overall stated purpose of the clause.
For example, a property I rezoned had an area that was 4.5m wide and 30m long. The nutjobs at town planning said that it had to be 5m by 5m. My response to that was that there wasn't a functional difference between 5m and 4.5m when it came to things like potential use for recreation and all that stuff specified in the purpose of the clause, and in addition, was mitigated by the much larger size/choice of vegetation etc. In addition, I looked on the map and named all of the large local parks that were more suitable to ball games etc that require large areas, which is precisely what you should do with your tennis courts being across the street. You get the idea.
In regards to your lower meterage on lot 2, the thing that is killing you is the unfortunate placement of the existing house, and some clause or other that says that the rear bounday must be 3m or somesuch, which is why you can't cut the block in half easily.
You can get around this in a couple of different ways also.
First, no one said you had to have rectangular blocks of land, so consider using a staggered or angled new boundary line.
Second, being a corner block, you may nominate which is your primary street and which is your secondary - which then means that you can decide which bit of the blocks of land are your front/rear/side boundaries. The logical thing to do, therefore, is to make lot 2 300m in total area, and then instead of nominating that that 3m bit in your diagram behind the existing house is the rear boundary, change the street frontage so that that area is your side boundary - because side boundaries don't have to be as wide as rear boundaries
Lastly (because I'm getting tired and want to finish this movie I'm watching), you may want to attack this as a 2 step process.
Subdividing naked land is a huge pain, because all of those rules apply that make your life miserable. Howeverrrrrrrrr, if you, say, decided to build another dwelling hard against the existing dwelling so as to make a duplex, and then subdivide the duplex into 2 distinct properties, you will find that the rules that govern subdivided already built properties are a lot easier to navigate than subdividing naked land, because there is always a clause that says "reasonably practical".
To illustrate, I'm subdividing 6 2BR units on one title at the moment, and I can't provide 5m x 5m private open space because the units are only 4.7m wide. Also, my rear boundaries are less than 3m. A planner brought it up, and I of course got annoyed and told him off, saying that I didn't have a universe sized crane that I could use to pick the building up and move it, nor did I have a giant printer to print an extra 0.3m of land per unit. The planner shut up, and I got my way.
Anyway, good luck
