As a fellow-Aussie (now in the U.S.) You handled it perfectly. "Slur for slur' does not have the same connotations there as it does here in the U.S. Racism is endemic in U.S. history, and is still alive & well-even if improving. Australia is only just beginning to have interracial problems, which ironicaly are actually being instigated by certain Middle Easterners of a certain religion & culture.
Mature Aussies tend to use their tongues first, and fists as a reluctant last recourse. Many fights are avoided with a buit of verbal one upmanship.
Good on yer mate! You told him - & he backed off.