Maybe the accuracy herein can be confirmed, but to my understanding:
Marks do not mean anything. The school that you are attending could simply be setting hard exams and assignments, and the unfairness in this compared to the rest of the state is equalized through the medium of the HSC exam.
It is all about the ranks.
If you are ranked 10/20
You get the 10th highest external mark as your internal, while keeping your own external exam mark. Everyone keeps their own external mark. This is then averaged, producing the final HSC mark.
Internals are moderated with accordance to your cohorts performance in the external exam. If your first mark was 70, and the first mark in the external exam was 95, that would be given as the first's (internal) mark, while first also keeps their own external mark (whether first was the one that achieved the 95 is irrelevant - as they receive the highest external mark as their internal, while still keeping their own external). Same averaging principle applies.
Really, the externals are critically important to do well in, as they have the chance to provide substantiation to the internal marks, and moderate them accordingly, or could bring them down profoundly!