Darklord,
i doubt you will have the space necessary as you will need to ensure the ceiling meets the fire code as set out in the BCA. This will add a min of 30 odd mm to the underside of the joists (Min)
Oddyssey
Yes, it is up to you what you do…..to a point
The insurance factor is one point
Another is that when it comes time to re-value your property, you still have a 3 bedroom home, and a HUGE "Storage" area downstairs
However, if you went through the right channels, and everything was legit, you may have turned that 3 bedder into a legit 5 bedder with media room.
Not an expert, but pretty sure there would be a significant increase in equity !