Preferences: Interface: Main Interfaces -- enable Mac OSX Interface
Preferences: Interface: Main Interface: macosx: Control external music players -- select "pause iTunes" or other options as desired.
I reverted to VLC 1.1.10.1 and recovered my live Audio Device option. I did notice in the latest OSX update that there is a supposed "fix" for OSX losing control of audio out on HDMI and Optical Audio ports! This may be all Apple's fault and have nothing to do with VLC.