The Immigration Office will calculate how many days you have stayed (in Aust) in the 5 years - they know exactly when you would have come in and left (as everything is online). They will then determine how many days you are short and will give you a RRV for the balance that you are short (of the 2 years). They are unlikely to give you a multiple-entry RRV as they want you to stay the period you are short. The cost of the visa will be the same as a 5-year RRV so if you are give a single-entry RRV for 1 year, the cost of that RRV will be the same as for a 5-year RRV.

There is currently a long wait for applicant who do not meet the RRV requirements. I got a fren who tried to apply RRV onshore, waited for almost 5 months before being approved for 1 year. Stuck there for 5 months

However, if you meet the requirements, the approval is almost instantaneous.

If you do not fulfil the "2 out of 5 years" condition, be prepared for a long wait for your application to be processed. Whether they will grant you or not depends on your circumstances, for example e.g. cultural ties (family ties in AU), own any businesses in AU etc....

For those who are unsure how they calculate your length of stay, they actually calculate from the day you submit your RRV application and look 5 years back. So you have to calculate your total length of stay 5 years back and hope that the total is 730 days or more. If you do not keep a record of it, you may request a "Form 1359 - Request for international movement records". It is a free service, and you may do it just via email.

Form 1359

In terms of the question of on shore or off shore application, my personal opinion is it does not seem to make much of a difference from AU point of view. However it does from an applicant point, because if ever you not granted/denied your RRV application, and you applied off shore, it pretty much means that you've lost of PR (however I heard there are other means of to fix this, but very tedious and costly) . On the contrary if you were to apply onshore, even if you are not granted RRV, you can still stay in AU indefinitely. Wait until you have accumulated the minimum of 730 days of stay then apply again. The only catch is while waiting, you cannot leave AU.