Three far-right nationalists who staged a mock beheading to protest against the building of a mosque in Bendigo in central Victoria have been found guilty of inciting serious contempt of Muslims.

Blair Cottrell, Christopher Shortis and Neil Erikson have each been fined $2,000 after they filmed the beheading of a mannequin with a toy sword outside the Bendigo council offices in 2015.

The so-called 'Bendigo Three' argued that their video, which was released on the United Patriot's Front Facebook page, was an act of free speech that focused on a specific tenet of Islam.

But the magistrate disagreed, arguing the video was clearly intended to create serious contempt for or ridicule of Muslims.

"We live in a community which is inclusive and that each individual deserves the right to live their life peacefully," Magistrate Peter Hardy said.

"You more than just crossed a line."

It is the first time a criminal charge under Victoria's Racial and Religious Tolerance Act has been tested in court.

Other charges relating to damaging public property were struck out.

The three men have since told the media that they intend to appeal the decision, saying they "expected" the outcome.

On the first day of the hearing, anti-racism protesters clashed with far-right nationalists outside court, forcing police to intervene.

The UPF's Neil Erikson yells at anti-racism protesters ahead of a court hearing at the Melbourne Magistrates' Court on September 4, 2017. ( ABC News: James Oaten )

Before the verdict, Cottrell told the court the matter "set a dangerous precedent for the state", saying the video was a form of free speech.

"It was aimed at a tenet of a religion, not a whole class of people," Cottrell said.

He added that the group could not control who watched the video and therefore target audience was "subjective".

"Conclusion drawn from watching the video is out of my control," Cottrell said.

But the prosecution said the video was clearly intended to create "serious contempt" towards Muslims, given the video's target audience and the fact it coincided with a campaign to stop the building of a mosque.

"They're picking up the acts of criminals … and purporting that to arouse hatred of Muslims in general," prosecutor Fran Dalziel told court.

She added the law did not require the prosecution to establish whether people's views changed as a result of the video, but rather to establish the intention.

"They were playing to the camera," Ms Dalziel said.

Other charges against the three relating to damaging public property were struck out. ( ABC News: James Oaten )

Professor Spencer Zifcak, the former president of Liberty Victoria, said he did not expect the decision would set any significant precedent.

"It's been well recognised for a long time that in international law and in domestic law in Australia, in relation to racial vilification, that hate speech of whatever kind ought not to be justified or covered just by saying its an example free speech," he said.

But he said the case showed that free speech also included "symbolic speech".

"They [the accused] weren't actually talking, this was a mock production … it was a symbol of somebody's head being cut off, but that's just as much speech as oral or written speech," he said.

"That's something that now can be established after this particular case."