Austin Goodfellow, who runs an engineering services company from Gundaroo, has put his water treatment proposal to Yass Valley Council, while a private developer proposing the 65-lot "Kyema" subdivision in the village has included a community wastewater system that would add $22,500 to the cost of each block, under a cost-sharing arrangement.

Yass Council says residents can't afford Murrumbateman's water systems and has recommended to NSW Planning approval of two new subdivisions for Gundaroo, with on-site septic systems.

NSW water and health agencies are on alert for cross contamination issues as they assess the subdivisions at either end of the village before making a decision. Of nine bores tested previously in the village, Yass Council found half had disease-causing E.coli.

Mr Goodfellow said Gundaroo has a contamination issue in ground and surface water. "They have to stop septics, they have to stop aerated wastewater treatment systems and go and put sewerage systems into these villages, or we are going to end up with a big issue, and that is why Murrumbateman has gone the same way. They had an issue."

Yass Council drew on reserve funds, borrowed money and used a small NSW Government grant to pay for Murrumbateman's $8 million sewerage system.

Mr Goodfellow said rural councils do not want to address the problem because they do not have the money.

"Villages, whether they know it or not, will have some kind of contamination issue. It is only people like us that have pushed the barrow for council to go and investigate. We have stepped up to the plate and put a proposal together. The council will look at it and talk to the rest of the agencies."

Yass Council's director of planning and environmental services Chris Berry said all septic tanks or aerated systems are being inspected in Gundaroo, including ones in flood affected areas. "We are not seeing any failures, they seem reasonably well managed, and don't need to be replaced," he said.

Mr Berry said NSW health, water and environmental protection agencies met with the council at the start of 2016, but could not resolve the question over water services for new lots. A decision was imminent, although he is pleased agencies are going slowly and cautiously on the issue.

If cross contamination concerns arose with on-site systems, he said bores would be banned in the new sub-divisions and residents would rely on rainwater harvesting from roofs.

Council has changed lot sizes, in some instances to better reflect other areas in the village, from a minimum of 2000 square metres to 5000 square metres or a hectare.

While still waiting for a NSW Planning decision, the council is progressing a new plan for Gundaroo that will integrate the new subdivisions, following submission from residents.

The council is revising its settlement strategy only six years after the previous strategy because of population growth. The 2010 strategy does not include the huge West Belconnen/Parkwood subdivision that straddles the NSW/ACT border and, if approved, will provide housing for 30,000 people over the next 30 years.

"We have just had the regional strategy review with new population projections for this area, we are now grappling with where to put growth and development. Certainly, places like Yass and Murrumbateman will take more urban growth rather than rural residential land and village growth," Mr Berry said.