Australian police on Monday shot dead the man who had taken the woman hostage and said they were investigating whether the incident was terror-related.
Malcolm Turnbull questioned how the man with links to terror, was out on parole before killing one man and injuring three police officers while holding a woman hostage.
A fatal shootout claimed by the Islamic State group was being treated as a terrorist attack by Australian police Tuesday, as the prime minister condemned it as "shocking and cowardly".
The gunman, Yacqub Khayre, 29, was one of two men acquitted by a jury in 2010 of plotting a suicide attack in Sydney.
Victoria state Police Chief Commissioner Graham Ashton said the gunman appeared to have acted alone and not as part of any ongoing plot or threat.
Islamic State movement has claimed responsibility for the violence.
Ashton confirmed the man worked at the apartment building, and said he was "at the wrong place, at the wrong time". "And making sure that all the intelligence that was coming and information coming from this investigation is being passed around to all state jurisdictions so everybody is on the same page", Australia's acting police commissioner Michael Phelan said.
Australian police are treating as a "terrorist incident" a Melbourne siege in which a gunman was killed.
Australia, a staunch ally of the United States, has been on heightened alert for attacks by home-grown militants returning from fighting in the Middle East, or their supporters, since 2014.
"He (Khayre) came out of the apartment with a shotgun and commenced to fire at police at the entry-way to the apartments".
A 36-year-old woman from Ripponlea sustained minor injuries after she was held hostage in the ground floor apartment.
Khayre had been on parole since late a year ago and had a long record of serious criminal offending including offences for drugs, firearms and violence and was being investigated for possible links to terrorism.
Khayre spoke about al-Qaida in phone calls to police and to Seven Network television, and Ashton said the gunman possibly had plotted to lure police into an ambush.
"It's too early to know how random this was in terms of whether it was something that he was planning or thinking about, whether police were the target or he's seized the opportunity he thought was presented to him last evening".
Victorian Premier Daniel Andrews said Khayre had served time for a 2012 home invasion and could not get parole when his minimum sentence of three years was served because of "terrible behaviour" in prison.
Mr Andrews also said he would give police more powers if needed after the Brighton terrorist attack.
"I hung around for a while and I heard gunshots, about 10 shots, and we got told it was a hostage situation", local resident Will Reid told the Australian Broadcasting Corporation.
Mr Turnbull said Australia's official terror threat level would remain at "probable".