Cannot filter by Category, only by Container.

I have been banging my head against Views and Categories for some months now.
It seems like I can almost get what I need, but there are fundemental problems in the way.

This is my hierarchy:

Portfolio (Container)
\___Commercial category
......\___Shop project
......\___Another shop project
\___Residential category
......\___House project

I'm using Drupal 5, with Category 5.x-1.x-dev and Views 5.x-1.6.
I understand that the Taxonomy module allows 'Vocabularies' that contain 'Terms', and the Category module changes those names to 'Containers' that contain 'Categories'.

The attached image shows a view that takes an argument of the Taxonomy: Term type.
The argument I have given it is 'all', so it is showing all the projects within the Portfolio container.
Slightly confusingly, the project nodes are of the type 'category'. Don't worry about that.

There are a couple of things I can't understand:

1) Why does the "Taxonomy: Term" field contain the name of the Container/Vocabulary? Shouldn't the name of this field be "Taxonomy: Vocabulary" ?

2) What does "Taxonomy: All Terms" mean? It seems to me that this field is really the "Taxonomy: Term". How can I filter by this field using an argument? At the moment I can only use an argument for the "Taxonomy: Term", which the screenshot shows is always "Portfolio". I need to filter by one of the Commercial/Residential columns.