Marvin, I am not a lawyer, but have researched copyright issues extensively
and here are my non-lawyerly answers.
1. what would happen, if i did pay copyright or royalties, then would i be able to say make my site into a business, and charge for downloads?
Answer: You can do this, it is not cheap, but it is what iTunes does, you pay a fee per song to the copyright holder and a flat fee to initiate the process and must hire a lawyer to draft and approve the contracts, probably many thousands of dollars US to get started.
2. how would i do that, in a legal way, to cover my self?
Answer: You would have separate contracts with each copyright holder, usually the record production companies. They might require minimum payments and such, they are not easy to deal with at all. There are cover contracts that cover many smaller record producers, contracts with ASCAP and BMI are examples.
3. now, if other people, say in australia, or overseas, know it is illegal, but put up their music collections from the 70s and 80s, which there are heaps
of sites, and music downloads, what would be the rammifcations, of that illegally?
would i be prosecuted?
Answer: I'm not sure of your question here. If you put up material that is copyrighted for downloads without permission, you do open yourself up for prosecution. If you sell something to another legally and they then put it up, you are not liable as the transaction between you and them was perfectly legal.
Hope that helps,