Laws allowing religious schools to discriminate against staff and students to preserve their faith should be scrapped, a major review recommends.
The government directed the Australian Law Reform Commission to come up with reforms that ensured students and staff were not discriminated against by religious schools due to their sexuality, gender, relationship status or pregnancy.
But it was also told to ensure religious institutions could continue to build a community based on faith and preference people of the same religion when hiring staff.
Religious schools have argued they should be allowed to discriminate in accordance with their faith.
Narrowing the scope for when a religious school could discriminate against students or staff under the Sex Discrimination Act and when it could treat staff differently because of religion was the best way to achieve this, the commission concluded in its final report, released on Thursday.
It also recommended protections for relatives and loved ones from discrimination, including same-sex, divorced or unmarried parents.
Religious schools have called for protections that allow them to fire staff who actively undermine their beliefs, as opposed to solely on the basis of their sexuality, gender or relationship status.
Schools should also be allowed to select students who uphold their values and ethos for leadership roles, Associated Christian Schools said.
The suggested changes would sound the death knell for faith-based schools, the Australian Christian Lobby said.
Gender diverse students shouldn't miss out on opportunities to become a school prefect or bring a same-sex partner to formal events, Equality Australia said as it urged the government to adopt the recommendations immediately.
"Discrimination against LGBTQ+ students and staff is happening in religious schools across the country because of gaps in Australian laws that makes it lawful," Legal Director Ghassan Kassisieh said.
Child psychologist and former Liberal MP Fiona Martin, who crossed the floor while she was in government to back the Sex Discrimination Act carve out being stripped, called for the wellbeing of vulnerable kids to be prioritised.
"Australians with diverse sexualities and gender identities are two to four times more likely to experience a mental health disorder, suicidal thoughts and self harm than the population," she told AAP.
"Young transgender kids are particularly vulnerable."
While no one should be discriminated against, the commission's report was not the government's policy and it would take the recommendations on board when drafting legislation, Attorney-General Mark Dreyfus said.
"Just as Commonwealth law already prohibits discrimination on the basis of race, gender, sexuality, disability and age, no one should be discriminated against because of their faith," he said in a statement.
"Equally, no students or member of staff should be discriminated against because of who they are. At the same time, religious schools must continue to be able to build and maintain communities of faith."
Prime Minister Anthony Albanese signalled he wouldn't proceed with the reform unless he had bipartisan support from the opposition but the coalition has called for the government to make its legislation public so it can be debated.
A number of coalition MPs have expressed support for religious schools being able to hire staff members of the same faith and act and teach according to their theology.
