In short:

Police used capsicum spray on neo-Nazis who disrupted an asylum seeker rally in Melbourne last night.

The group was clad in black and chanted white supremacist slogans while holding an offensive banner.

Police said no arrests were made and nobody was injured.

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[–] Ilandar@aussie.zone 1 points 3 weeks ago

The government is proposing to introduce two new serious vilification offences with higher maximum penalties, but it is not clear whether yesterday's neo-Nazi protest would fall within the scope of the laws.

...

Dr Roose said recent changes to laws that had seen people successfully prosecuted for performing the Nazi salute had forced neo-Nazis to change their behaviour.

"They used to have swastikas, they used to do the salute at every protest, they now can't do that," he said.

"They've become quite skilful at reaching the threshold but not necessarily stepping over it.

I'm not sure I see the contradiction either. From the reporting it doesn't sound like the neo-Nazis broke any laws. Are you aware of something which says Victorian Police can only use capsicum spray on people breaking the law? This suggests they also have the power to use it as a deterrent before illegal behaviour has occurred, which I imagine could have been the case if they were attempting to separate neo-Nazis from pro-refugee activists.