The man's 12-year-old daughter was released and reunited with her family, New South Wales police said. She was distressed, but otherwise unharmed, police said.
Police did not immediately say whether explosives had been found in the man's backpack.
"Towards the latter part of the time we've been here, those negotiations have started to break down and then deteriorate to a stage where police have taken action to break into the premises and take a 52-year-old man into custody," Police Assistant Commissioner Denis Clifford said. "He's currently assisting police with their ongoing inquires."
Police have not released the man's name or details of his demands.
Clifford previously declined to comment on reports the man was arrested Monday at a government building after he was involved in an incident at the state parliament in Sydney.
Jeremy Buckingham, a lawmaker from the minor Greens opposition party, said the man spoke to him Monday at state parliament about legal issues.
"He said he had information he wanted to show the attorney-general. He did not clearly articulate his issues," Buckingham told parliament Tuesday.
During the standoff, Australian broadcasters showed footage of the man looking from a second-floor window shirtless and wearing the kind of wig worn by judges and lawyers in Australian courts. At one point he spat on the wig.
He also swung a glass bottle like a hammer to smash a plate-sized hole in the office window. He yelled through the hole and threw the bottle, then a telephone handset, which was left dangling by its cord.
He extended his hand from the broken window to make a peace sign then threw out a note. Clifford declined to comment on its contents.