Seems good. At least that's what I wanted to setup.
Only thing: have you setup the port forward?
For what I understand, the dhcp server (from the lan let's say) should give the ip of the lan ip as the dns server
then forward the port 53 udp from the lan ip to the 127.0.0.1 ip.
It should then be able to resolve internaly. For external resolution, I think tinydns should give the request to the dns forwarder.
At this point, it should work as the package wants us to do so.
I have not tested this solution right now, but as soon as I can I will try the exact same config as yours.