Mr Habib claims he was robbed, assaulted and abused by officers, after reporting a double shooting in the Sydney suburb of Granville.
The 50-year-old witnessed the aftermath of the murder of Bassam Chami and Ibrahim Assad as he drove his son home from work.
Mr Habib says he told police he didn't know who was involved in the shooting, but he and his son were arrested and forced into an eight hour interview.
He says their clothes and car were also seized for forensic examination.
Mr Habib says he plans to sue for false imprisonment and assault.
Police say if he wants to complain, there are avenues open for him to do so.
Mr Habib's solicitor Peter Erman on Monday said he had written to police asking why the Habibs were kept at the police station.
"We are taking legal action ... but we are still getting together all the facts," Mr Erman said.
"I've written to the police asking the purpose of their holding my client, given that he was not a suspect and never was a suspect.
"My client was there for the purpose of giving a statement, but it took on some of the trappings of a formal interrogation.
"My own impression is that this has been a major set back to this fellow psychologically and to his family.
"He is still undergoing treatment for what he went through in both Egypt and Cuba and I'm sure this won't assist."
Egyptian-born Mr Habib, who returned to Australia in January
2005, was captured in Pakistan in 2001 and later detained by the US
at Guantanamo Bay as a suspected terrorist. He was not charged.
Mr Habib told ABC radio that officers refused his offer to make a police statement on the shootings at his house and insisted he be interviewed at Parramatta police station.