There is a 'working group' looking at the Baxter extension. I gather the group is pretty small. The highway crossing would be another big deal, meaning I can't see it happening easily (or cheaply).The Mooroduc Highway already has the Necessary lights up to allow for a rail crossing, its not really that much of an issue, just install the light and the gates and your good to go. The Main level crossing issue is the one at Frankston Flinders Road, as the line has been paved over there. You are Correct in that it is not a priority, just a Very long term goal. From my visit last year, they informed me they were hoping to get some secondhand trackwork from the LX Removals in Melbourne to use on the extention eventually.
I visited last year, and asked them about it amongst other things. The impression I got was that the usual resources (time, money, bodies on the ground) are flat out keeping up with everything else needed to run a heritage railway.
This is a few years old, but it has some details on how they want to it. (Scroll down to the B2B Part)