FACTUAL INFORMATION The crew of an instrument flight rules (IFR) Beech 200 (B200) was conducting a base check which would entail a practice non-directional beacon (NDB)/distance measuring equipment (DME) approach to runway 12 at Williamtown aerodrome. The pilot under check (handling pilot) and the checking pilot briefed for an approach to the minima, followed by a missed approach to 1,500 ft and then join the circuit for circuit training. The missed approach was to be conducted with the aircraft configured to simulate asymmetric operation. While inbound to Williamtown, the handling pilot briefed the approach controller of their intentions and was subsequently cleared to make the NDB/DME approach. The handling pilot then advised the approach controller that, after the NDB, the aircraft would conduct a go around. The check pilot did not hear this transmission due to the aircraft's communications configuration; which prevented his hearing any air/ground transmission by the handling pilot. Prior to the missed approach point the handling pilot commenced an asymmetric missed approach and reported to the aerodrome controller. The aerodrome controller (ADC) instructed the crew to go around, to maintain runway heading and to maintain an altitude not above 500 ft. The transmission from the ADC was broken and both pilots believed that the assigned altitude was 1,500 ft. The handling pilot readback the requirement to maintain runway heading but did not readback the altitude, which was contrary to Aeronautical Information Publication (AIP) procedures. The ADC did not challenge the lack of the readback of the altitude by the pilot, which was contrary to air traffic control procedures. The ADC's intention was to limit the altitude of the B200 to establish 500 ft vertical separation with a formation of Macchis that was entering the circuit via the initial point. The Macchi pilots had sighted the B200 as they tracked from the initial point and pitched into the circuit. During the missed approach, at approximately 1,200 ft, the B200 pilots saw the formation of Macchis pass from their left to right in front of and slightly below the level of their aircraft. The Macchi formation passed with approximately 200 ft vertical separation. ANALYSIS The misunderstanding by the handling pilot of the B200 in relation to a "go around" and a "missed approach", and the fact that the check pilot did not hear the transmission, created a developing situation that was appreciated differently by the two pilots and the ADC. The minima for the "missed approach" was 570 ft, whereas a "go-around" could have been commenced from a lower altitude. While the radio transmission quality made communication difficult, the lack of radiotelephony discipline by both the handling pilot and the ADC ensured that the opportunity to resolve any misunderstanding was lost. SIGNIFICANT FACTORS 1. The pilot of the B200 requested a "go around" instead of a "missed approach" 2. The check pilot could not hear the handling pilot's air/ground transmissions. 3. The pilot did not readback the requirement to maintain 500 ft to the ADC. 4. The ADC did not challenge the pilot to readback the altitude requirement.