A conversion from an existing structure (like a shed/garage- Class 10A) to a secondary dwelling (granny flat- Class 1A) is indeed a 'new dwelling' under the definitions. A change of use is what you're after and that is still seen as a 'new dwelling' because it's being re-classified with works being done to bring it up to standard...these new works include re-certifying the slab from a class 10 slab to a class 1 (needs a willing Engineer), minimum insulation, BASIX Certificate (energy efficiency) compliances, waterproofing to wet areas, termite protection etc...
So in my experience, the structure must meet ALL of the SEPP controls to be considered as a Complying Development under the 'Affordable Housing SEPP-2009'. This includes a 3 m rear setback, 0.9 m side setback, 3.8 m max height (measured from lowest natural ground) plus some other regulations with regard to minimum landscaping, access to private open space etc.
Notwithstanding this, you can go for a DA instead, which most Council's will consider on a merit basis. Note, they can still refuse you and you won't know until after you shoot for goal- it's a gamble with a DA Application. Following the SEPP absolutely guarantees approval. A DA also takes longer (60 days vs 10 days), requires much more drafted material/statements plus it gets advertised and notified to neighbours (the SEPP does not). There are also certification costs relating to the compliances noted above.
Most Council's allow a 'Pre-DA Meeting' which will help them asses the application before you formally apply for the DA> they charge around $400 - $500 and you would attend with the draftsman to meet the panel. You would still need to attend with some drafted plans which will set you back approx $2,000 initially though. So it is a gamble, but one that can pay off.
I hope this helps.
P.S. I hate doing conversions because people think it's easy- it's NOT and it takes twice the work and the paperwork costs twice as much as a new granny flat under the SEPP> I only ever do it when the client fully understands this....they rarely do
1. A new granny flat under the SEPP costs around $5,500 to approval all up including all inspections.
2. A granny flat conversion cost about double that plus the physical works to bring a garage/shed up to the BCA Dwelling standards.
I get a hell of a lot of people calling me wanting granny flat conversions but they don't want to pay the required fees- and most of it doesn't go to me, it goes to Surveyors, Engineers and Council. They usually think it's just a matter of filling in a simple Council form. I wish it was but it's not.