The pipe that you’re referring to would have been originally necessary to bring the Water Utility’s supply to the block of land where your Plan is now located, and it would have been installed by a Plumbing Contractor engaged by the Builder / Developer.
So in the view of that Water Utility (Hunter Water in this case), the Owners Corporation of a Strata Development is now expecting them to accept responsibility for all on-going maintenance, repairs, and replacement of a section of underground pipework of an unknown standard, that was installed by “others”, and which currently services a single development via a single water meter.
This has been a bone of contention between Water Utilities and property owners for many years, with one argument being that in most instances (but not all, and not recently) the old Water Boards supervised the construction of these “main-to-meter” installations, and should therefore be prepared to take-over the ongoing maintenance / repairs of the completed works. A counter-argument was that if the pipe supplied a single Development, it was private, and that the installing plumber was not Contracted to the Water Utility.
Anyway, as you have now found out the compromise position was that the Water Utility can at its discretion take-over the responsibility for maintaining main-to-meter pipework having a “small diameter” (in your case <40mm), on the basis that these small-scale installations could not be as easily be “mucked-up” by plumbing contractors.
So it’s going to cost each Owner in your Plan $500; not the answer you want, but hopefully you’ll now better understand the rationale behind your Water Utility’s position.