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It's possible GB. I've had relatives living on Christmas Island 30 years ago as well as more recently. Somewhat ironically, it's operated as a bit of a half-way house, made up of people who were predominantly connected with the phosphate mining (which is now almost exhausted). People who moved there were significantly not Australian residents or citizens, but came from Malaysia, Singapore, and South East Asia more generally. They got their permanent residence there.
I see 2 obstacles. First, the population that's already there will jack up and will have to be bought out to move to the mainland. CI is a bit like Norfolk Island, needing everything (just about) brought in from the mainland, except possibly seafood (not red crabs!). Second, it would involve creating a second class of citizen to be able to restrict movement from one piece of Australian territory to another. The Parliament could try enacting laws, but given its recent woeful record of defending them in the High Court, it might involve a constitutional amendment. No such amendment has really been successful without bipartisan support.
Make the locals a really good offer + relocation assistance? Not ideal I agree, but we don't have a spare island in the Indian ocean... or do we?
The refugees will be second class citizens, yes, but it's not a permanent situation and they are offered free transport back to their homeland if they decide they'd prefer that. If they choose to stay, they are made safe and given shelter. Food and services must be worked for. Anyone who protests or tries to starve himself to death gets deported back from whence he came. Reward those who do well with what's given.
The information campaign would lay out all the new laws ahead of time, and target the potential refugees and the boat captains. You don't say "it's illegal", you say "Do what you want, but these are the laws. You might want to think twice about paying some joker all that money for the boat trip. If you come, you'll be made safe and given shelter, that's all".