In 1905, the Neglected Children and Juvenile Offenders Act was passed to replace the former Industrial and Reformatory Schools Acts of 1866. The Gosford Farm Home for Boys was established under this new Act. In the early 1900s, the Government Surveyor recommended the Mount Penang site as a possible location for a Government sanatorium; however, this was never acted upon.
During the same period, the Government also looked for a site on which to construct a new centre for juvenile delinquents. The new centre would be based on similar principles as the Brush Farm in Eastwood, where hard physical work and a basic school education would combine to assist in the rehabilitation of delinquent boys. The centre would also take the boys from the nautical training ships, which had become outdated and expensive to operate by the early 1900s.

On 1 July 1912, a party of approximately 100 boys aged between ten and sixteen years began clearing a site at Mount Penang near Gosford, in order to build a new State-controlled farm for wayward boys. The farm was to replace the former Nautical School Ships and the small Brush Farm. All the boys in the working party were formerly of the Sobraon, and were supervised by the former probation officer of the Nautical School Ship, Herbert Charles Wood.

The site was situated on the lip of a reasonably flat summit of a sharp escarpment, three miles west of the town of Gosford. The site was also isolated from main population centres, a requirement that had worked against the Brush Farm site at Eastwood which had been encroached upon by residential development. It was the combination of these factors of inaccessibility and isolation that led the committee appointed to locate a new site for the training of male juvenile delinquents to choose Mount Penang for their site. The chosen location of Mount Penang was one mile from the track to Sydney, which went via Mangrove Mountain and Wiseman's Ferry. However, although the remoteness worked in favour of the choice of the Mount Penang site for the farm, it did create serious problems during the construction of the complex, as access to the proposed site at Mount Penang was via a steep track, with gradients of between 1:8 and 1:11.