The Citipointe Christian College faced a possible review of its state funding and anti-discrimination action over the contracts which included gender and sexuality clauses.
The documents that were sent to parents last week said the Carindale college will "only enrol the student on the basis of the gender that corresponds to their biological sex".
It also said homosexuality is "sinful" like bestiality, incest and pedophilia.
The school withdrew the contracts on Thursday after widespread criticism, including from the prime minister.
The college's principal Brian Mulheran said he decided to take extended leave to give the school community "time to heal" after the "hurt and distress" caused by the contract furore.
"Our intention was only to offer families a choice about how their families are educated ... I am heartbroken that by doing so ... our community has suffered so much," he said in a statement on Friday night.
"Citipointe needs to be ready to welcome students on Monday with a positive outlook to start the new school year.
"With this in mind, I feel it is right for me to stand aside and take extended leave in order to reflect on what has transpired and provide the College community time to heal."
He again apologised about the documents, and to gay and transgender students.
"I have been devastated talking to our students who have suffered hurtful and hate-filled verbal assaults simply because of their beliefs or for attending the college," he said.
"I am sorry that some students felt that they may be being discriminated against at Citipointe.
"We would never discriminate against any student on the basis of their sexuality or gender identity."
Liberal National Party leader David Crisafulli said it was "absolutely the right decision" for the principal to step down.
"The contract clearly wasn't one that was right either in law or in practice," he said on Saturday.
"At the heart of it we have to reflect on the impact that these things have on the kids."
The contracts received a backlash from students, families of pupils and members of the LGBTQI+ community who protested outside the school and even caught the attention of the prime minister.
Scott Morrison this week said he opposed the documents and flagged changes to the Sex Discrimination Act, a move backed by federal MP Angie Bell.
"The support from the prime minister will give great relief to many parents and students all around the country who fear discrimination in a learning environment," she said.
"Amending the Sex Discrimination Act will be much more than just protecting children with differing sexual orientations, it will protect a child's relationship status and or pregnancy and gender identity.
"Children deserve not to have their personal lives broadcast or made to feel ashamed by oppressive behaviour."
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