I've no idea whether you're agreeing with me or not. Yes you set the local domain name, *but* and this is the thing I don't understand, if you look at /tmp/resolv.dnsmasq you'll find "server=/local/dns.server.ip.address", and 'local' is literally 'local' no matter what you set your local domain name to. To me this makes no sense. You'll also find any IPv6 dns resolvers in this file as well if you're using IPv6.
/tmp/resolv.conf also provides nameservers to dnsmasq rather than /etc/resolv.conf. /etc/resolv.conf points to loopback (127.0.0.1), this is so the router uses dnsmasq as its resolver which means the router can lookup dhcp hostnames etc that it has provided.