Tony Abbott says the Sydney cafe siege shows there needs to be more checks and balances in Australia's visa and citizenship processes.
The prime minister and NSW Premier Mike Baird on Sunday released the joint federal-NSW inquiry report into the terror attack last year, with Mr Abbott saying governments needed to learn lessons from the siege.
"Plainly, this monster should not have been in our community," he told reporters in Sydney.
"The difficulty is that while he was well and truly on a lot of radar screens, he was routinely assessed as not being a threat to himself or to the community.
"Plainly, at some stage he did become a threat. We obviously do need more checks and more scrutiny in the visa process, in the citizenship process."
Hostages Katrina Dawson and Tori Johnson died when the 17-hour siege came to an end at the Lindt cafe in central Sydney on December 16.
Man Haron Monis, who had taken 18 people hostage, was shot dead when police stormed the cafe, ending the crisis.
Mr Abbott said it was pretty obvious from the report that at every stage Monis had been given the benefit of the doubt.
"The cumulative effect of the benefit of the doubt being given to him time and time again is that he was able to wreak havoc on our community," Mr Abbott said.
He says there is an ongoing debate in a society such as Australia's between the rights of the individual and the protection of the community.
"My judgment is that while having always to respect both, the question of precisely where we draw the line in the era of terrorism will have to be reconsidered and the line may have to be redrawn," he said.
The report recommends that information about identified terror suspects should be provided as part of any bail conditions, NSW Premier Mike Baird said.
"I have a view it should actually go further," he said.
The report also comments on the need to reduce the number of illegal firearms.
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Mr Baird says there are close to 250,000 illegal firearms cross the country.
"We need to look at all options we can to ensure that we reduce the number of illegal firearms across this state and nation," he said.
Mr Abbott said the report concluded decisions made by various government departments in relation to Monis were "justifiable under the circumstances".
"But plainly, in their totality, the system has let us down," he said.
"The system has let us down because plainly this guy shouldn't have been in the country, he shouldn't have been out on bail, he shouldn't have had a gun and he shouldn't have been radicalised to the extent that he claimed to be conducting an Islamist death cult attack here in Australia."
Australia needed to re-examine the system and ask itself if it needed to change the "tipping point" from protection of the individual to safety of the community, he said.
Mr Baird said while decisions made by the various agencies were considered reasonable by the review, the system had let the community down.
"The recommendations that have come forward - we need to act and we need to respond and we will be doing exactly that," Mr Baird said.
