The 157-year-old hotel is the subject of arson investigations after it was razed in a fire last October.

The owner of the Diggers Rest Hotel lodged an application for demolition with the council in December after the council ordered the owners to undertake "make safe" engineering works on the parts of the building still standing.

The blaze caused more than $1million damage and is still under investigation by the arson squad.

The hotel was closed for renovations at the time of the fire and was thought to be beyond repair.

However, Heritage Victoria lists the hotel as one of the few surviving Mount Alexander Road gold rush wayside hotels.

It is also covered by a heritage overlay that requires any works, including demolition, to meet planning approval from the council and for the public to have the opportunity to make submissions.

The hotel's owner, Roger Smith, said he was still "extremely upset" about the loss of the historic hotel, and pledged to build a "bigger and better hotel for the people of Diggers Rest".

"The cost to repair it was beyond all reasonable expectations," he said.

Diggers Rest Residents Association president Bob Rau said he had canvassed the opinions of a number of residents and lodged an objection on behalf of the association as well as a personal objection.

"Most people are not in favour of the complete demolition. They want something of the original site to be retained.

"That building was recognised as a building of significant historical character."

Mr Rau said the historic hotel was the last remaining link to the region's gold rush heritage, a monument to the area's history and a source of community pride.

"It was a landmark. As you came into the township there it was," Mr Rau said. "Our personal objection is we did not believe the full demolition was required."

Detective Senior Constable Mick McCormack said investigations at the site were finished and it was no longer a crime scene.