Huh, adding that no-op callback on 12.1 beta really does work. What a strange bug.

Enabling/disabling mute in bluetooth input in Monterey Audio MIDI Setup app enables/disables mute in the output, so looks like this is new behaviour. Whether it's intentional or not is another matter. Log a bug I guess.

Pass through virtual kext drivers have migrated over to user level AudioServerPlugins of which BackgroundMusic and Blackhole are excellent examples.

I think you're supposed to use AUv3 audio units and instead let the UI be loaded into the AU hosting app. Although you wrote my goto AUv3 sample code (auv3test5) so I guess there's some reason why AUv3 is not a solution to your problem.