"While I was in there this chap came from the front, bolted into the shop, grabbed knives then grabbed the boss and took her outside ... and threatened her," he said.
"Then he took her outside and they were trying to quieten him down, trying to stop him doing anything, any harm."
Mr McCaw said the man threatened to cut his own throat before "starting on" the woman.
"He said 'I'll cut her throat', and everyone was around and they tried to talk him out of it, but he wouldn't [listen]," he said.
Mr McCaw said police then "virtually had to shoot him", firing six to eight shots.
"They were lucky to get shots in I think," he said.
Connor Bennett also witnessed the drama unfold.
"The guy was trying to ... trying to stab the girl," he said.
"Tried to stab her once, and tried to stab her twice, and the police fired shots.
"She fell on the ground, because she got shot as well. She was moving, she was screaming in pain."
He said police initially fired three shots, then another four. Police said the man died at the scene.
Police Commissioner O'Callaghan could not say how many times the man was shot but he did confirm the 37-year-old woman was also shot and was being treated in hospital for gunshot and stab wounds.
A hospital spokeswoman said she was in a "serious but stable" condition.
Commissioner O'Callaghan said police tried to negotiate with the man without using force but were unable to subdue him.
"Attempts to negotiate with the 38-year-old man failed and it will be alleged a number of officers fired their weapons," he said.
"The man received a number of gunshot wounds and was declared deceased at the scene."
Commissioner O'Callaghan said the woman did not know the man.
The Major Crime Squad is investigating the circumstances surrounding the shooting, while Internal Affairs is inquiring into the conduct of the police officers.
Commissioner O'Callaghan said the officers had to make a very difficult decision.
"The officers there were under a lot of pressure, obviously it's a complex situation, they have to make a decision in rapid circumstance and it seems they were certainly concerned about the welfare and the life of the woman concerned, and so they responded as they've been trained to do," he said.
"But we have to remember also the victim who was being held at knifepoint and her family, and also the person who is now dead and his particular family.
"I've been in the police force for 40 years and I've never been faced with having to make a decision like that, so it's extremely stressful.
"They have to make a decision in a split second, that decision will have far-reaching circumstances - it's now subject to an inquiry and a man has lost his life.
"They will be under a lot of pressure but they would've responded like they are trained to do in their training."
abc.net.au 8 Nov 2014
What the public seem to unaware of and the corporate media not telling the people, is that police orders are shoot to kill.
Interviews with police indicate that 7 rounds (as in this case) are not necessary to subdue a person.
The police now shoot at victims.
Now the coverup and falsifying of facts begins to exonerate the police as 'hero's'.
Australia the police state - even if you don't do anything wrong we will shoot you.