How does the HK decide whether to use the audio from iPod connection or audio from 3.5mm?
User selection. Via menus.
Ah, that's what I thought. So you have to piss around swapping from gayPod to gayPhone 
Of course. How else?
The menu option for aux in is buried deep in the os. But the user would have to select the option required regardless. No?
Bluetooth reciever affects non of this of course. Just does away with plugging in the 3.5 Jack to the phone. Which is much more of a fiddle.
Yeah, understood, was just hoping it was doing something clever, so (for eg) it could be happily playing gayPod, and only push through the gayPhone audio when it senses audio.
Nope. It's a bit thick that way. The fact the aux in option is buried so deep in the Menu was partly why I considered replacing the ipod with the reciever. But the phone is more fiddly selecting tracks. Not good when driving.
So it's better to have phone on dash board connected via bt. And use ipod generally by click wheel as normal. Then select phone by click wheel, if needing tomtom etc.
In other words, if blutooth reciever is on aux in. I can select music from ipod or phone outputs, via Hk click wheel. Only cable involved is charger.