They have to pay you the full amount on the DHS letter and take the tax out of your remaining super, this tax is not going to you but direct to the ATO so they are not doing anything illegal, otherwise DHS would have an additional box on your application to factor in this tax, someone applying for their super for financial hardship/compassionate grounds would not have the means to pay this kind of money out of their own pocket.
I worked at a super company for 10 years and this is how it was done. We were always told that the amount the client is claiming is what they should be paid in full and there was never any question of this, the tax comes out of the remaining balance and a tax form similar to a PAYG group summary was sent to them to include in their tax return to show that they were paid money and tax had been collected. Super funds are very heavily regulated and audited, if it were 'illegal' they wouldnt be doing it.
This is how mine was done, I got the full amount on my DHS letter and the tax taken out of my balance, this was on top of the amount DHS approved for release. Its no different to the tax they take out of your contributions and send to the ATO on your behalf.