It is true that if you go to selected universities, they will consider that your UAI was a few points higher (say 1-3 points).
For example, if i want to study at the University of Sydney, and i am currently at a Newcastle School, then my UAI will be the same. However, if I opt to stay at Newcastle University, that University will pretend that my UAI is a designated number of points higher, and i might be able to just get into a course that i would not have otherwise been able to get into.
This is done so that local students do not leave for the bigger cities.
P.s The rumour about the student council reps getting more points is funny.