PayPal Australia Pty Ltd is an Australian based entity with a ABN & ACN number, NOT an overseas entity.
Paypal's processing requirement is that it’s all done locally to comply with APRA regulations as well as ensure there’s minimal processing latency for a transaction to be approved quickly.
https://abr.business.gov.au/ABN/View/93111195389
The User Agreement for processing between the Merchant & PayPal Australia Pty Ltd is valid in AU only & we’re considered a local processing entity, not a foreign one: https://www.paypal.com/au/webapps/mpp/ua/useragreement-full?locale.x=en_AU
The bank is likely trying to scam you out of some F/X fees on his card.
You can take the matter to Consumer Affairs as, legally, you have an Australian PayPal Consumer account with a local Bank / credit card used as a funding source & SHOULD NOT be charged f/X fees.