Geoff Phillips said that a planning panel report in December last year found the 20-hectare site to be unsuitable for industrial purposes.

"Basically, they've been told not to do it," Mr Phillips said.

"The land is hollow underneath and collapsing across the whole site where water tables have also become exposed."

Mr Phillips said the land had been intensively mined in the gold-rush era and therefore had poor soil structure and was subject to flooding.

"It was set aside as a wildlife corridor and about five hectares of the land has been called a pollution abatement zone by the Environmental Protection Authority," he said.

Mr Phillips said he had legal documents from 1994 when he bought land adjacent to the site that the area was zoned residential.

The proposed water initiatives would also badly affect a water hole at Calembeen Park that was connected to the site, he said.

Shire chief executive officer Kaylene Conrick said an external planning panel was convened in November last year to consider submissions for future use of land.

"The panel did question the use and development of this land and raised the prospect of some sections near the creek being investigated for rezoning for conservation and recreation purposes," Ms Conrick said.

"However, a subsequent VCAT determination relating to the nearby Anne Street Timber Research facility found there was no strategic justification to alter the industrial use and development of the section of land now being considered for the industrial site.

"Council recognises the need to strike a balance between competing interests in areas of industrial and residential interface and this study is key to enabling the Council to determine the merits of these projects."

A $45,000 grant from the State Government is being used to research the feasibility of the 20-hectare zoned industrial land that includes a sustainable water initiative by the council.