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Stage III, the interiors, started with Utzon moving his entire office to Sydney in February 1963. However, there was a change of government in 1965, and the new Askin government declared that the project was now under the jurisdiction of the Ministry of Public Works. In October 1965, Utzon gave the Minister for Public Works, Davis Hughes, a schedule setting out the completion dates of parts of his work for stage III. Significantly, Hughes withheld permission for the construction of plywood prototypes for the interiors (Utzon was at this time working closely with Ralph Symonds, an inventive and progressive manufacturer of plywood, based in Sydney). This eventually forced Utzon to leave the project on February 28, 1966. He said that Hughes' refusal to pay Utzon any fees and the lack of collaboration caused his resignation, and later famously described the situation as "Malice in Blunderland".















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In March 1966, Hughes offered him a reduced role as 'design architect', under a panel of executive architects, without any supervisory powers over the House's construction but Utzon rejected this. The cost of the project, even in October of that year, was still only $22.9 million, less than a quarter of the final cost. A room decorated to Utzon's original design.The second stage of construction was still in process when Utzon was forced to resign. His position was principally taken over by Peter Hall, who became largely responsible for the interior design. Other persons appointed that same year to replace Utzon were E.H. Farmer as government architect, D.S. Littlemore and Lionel Todd. The four significant changes to the design after Utzon left were: The cladding to the podium and the paving (the podium was originally not to be clad down to the water, but left open. Also the paving chosen was different from what Utzon would have chosen)

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