No school will be allowed to exclude students based on their sexuality under changes to laws the Morrison government plans to bring in.
A review of religious freedoms included a recommendation to allow religious schools to discriminate against students on the basis of their sexuality.
But the government is rejecting that, and it is strengthening discrimination laws to remove any opportunity for schools to discriminate.
"Our government does not support expulsion of students from religious non-state schools on the basis of their sexuality," Prime Minister Scott Morrison said in a statement.
"I also know that this view is widely shared by religious schools and communities across the country."
The coalition government is working on amendments it plans to make law within the next two weeks.
"I will be taking action to ensure amendments are introduced as soon as practicable to make it clear that no student of a non-state school should be expelled on the basis of their sexuality," Mr Morrison said.
The issue arose in a controversial review into religious freedoms, led by former Liberal minister Philip Ruddock, that called for stronger rights for schools to reject gay staff and students.
Protection of religious beliefs already exists in almost every state and territory jurisdiction, except NSW and South Australia.
Mr Morrison hit out at "misreporting" of the Ruddock review, which he said actually proposed restricting the rights of schools to expel students based on religious doctrine.
"I will be writing to the Opposition Leader Bill Shorten to invite him to work with the government on a bipartisan basis to provide certainty in this area," Mr Morrison said.
Mr Shorten also wrote to the prime minister on Friday, offering his support for changes to the Sex Discrimination Act.
"To remove the exemptions that currently allow religious schools to discriminate against children on the basis of their sexual orientation and gender identity," Mr Shorten wrote.
He also called on the government to release the full Ruddock review so the public can have a say.
The review was commissioned after last year's same-sex marriage plebiscite to appease conservatives who feared the change would restrict religious freedoms.
Catholic Archbishop Mark Coleridge said the church had not sought concessions to discriminate against students or staff based on their sexuality.
Islamic Council of Victoria spokesman Adel Salman told Network Ten religious schools should be able to teach their values and staff and students should abide by them at school.
Greens MP Adam Bandt welcomed the announcement to "close this loophole" but told ABC News the amendment doesn't go far enough, saying it should cover teachers as well.
The Greens plan to introduce their own bill this week to amend the sex discrimination act to protect both students and teachers at religious schools.
"If you want the privilege of educating the next generation of young Australians, you don't have the right to discriminate, period," Greens Leader Richard Di Natale said.