Schools will be able to refuse admission to students if they are of a different religion.

That exemption will only apply if the school is operated solely for students of a certain religion and it has published a policy about its admissions practices.

Similarly, schools can refuse to hire a staff member or contractor if their religious conviction does not align with the school's published policy.

Mr Barr said the bill struck a balance between the right to freedom of religion and the right to be free from discrimination.

“It will simply be a values question about whether a teacher or student is prepared to sign up to the religious values of the school but it puts the onus on the school to publish those values," Mr Barr said.

"So in essence if a school wants to discriminate, they need to be very clear that they are going to discriminate, that they hold their religious beliefs higher than anything else and that is consistent with best practice discrimination law in this country that's been practiced in Tasmania for sometime now."

He said "the market is going to dictate what happens here", and with the exception of a few niche schools, most would not seek the exemption at the peril of losing students.

"Frankly there will still be situations where there are hardline religious schools who will seek to discriminate but there are not many of them in the ACT and they would seek to do so, they would have to be public about that and do so at the detriment of their own finances and their own capability to offer an education program," Mr Barr said.

“If you want to be so hard line and so doctrinaire about your religion that you will exclude anyone who isn’t a hardline advocate of that religion, you’re not going to find many enrolments in the ACT."

However ACT Opposition leader Alistair Coe said the government "seems to have backtracked more slightly from its more extreme position of a week or two ago".

Both Mr Barr and Mr Rattenbury denied this was the case, and said legislation was based on the Tasmanian anti-discrimination laws, which were best practice.

But Mr Coe said while the bill was more of a "commonsense approach" in his view, he warned it could have unintended consequences.

“The way the legislation has been written is a complete repeal of section 33 of the previous Discrimination Act. Section 33 really does allow for religious schools to teach certain things that are consistent with their faith and I think most people would expect if you go to a religious school there’s going to be certain elements of that faith that are taught," Mr Coe said.

"By repealing section 33 there is a risk that certain schools may not be able to teach certain things that are consistent with their faith. Whether this was the intended outcome of this legislation or whether it was an unintended problem because they’ve rushed it, who knows."

However the bill's explanatory statement said even without without the Section 33 exemption the Discrimination Act would not stop schools teaching religious beliefs, as the laws distinguished between direct and indirect discrimination.

"While it would be unlawful to treat an individual student unfavourably because of a protected attribute, it would not be unlawful to impose a general requirement or condition on all students even though this may disadvantage a student who has a protected attribute, provided that this requirement is reasonable," it reads.

Just-Equal founder Ivan Hinton-Teoh also expressed reservations about the legislation.

"While I welcome the government's attention in addressing discrimination experienced by LGBTIQ+ students and staff I'm concerned that these reforms do not go far enough. These reforms may create an unintended and particularly insidious new type of discrimination," Mr Hinton-Teoh said.

"Will students and teachers alike be compelled to define themselves as broken or sinners due to their sexuality or gender identity if they wish entry to the school? Will LGBTIQ+ staff be uniquely compelled to publicly affirm that marriage is only between a man and a woman so that they can teach mathematics or be employed in the school's administration?"

Mr Rattenbury acknowledged while the new exception would permit a level of discrimination against teachers and staff, religious schools needed to employ staff whose beliefs were in line with their doctrine.

“There is no doubt there are times when different human rights come into conflict and they are competing in this regard and it’s a matter of trying to strike the right balance between those competing interests," Mr Rattenbury said.

“We obviously looked at a whole bunch of legislative options and the directorate presented us with a number of scenarios, but this one is the one that does strike the balance with the right to religious freedom and the right to freedom from discrimination. I’m comfortable this is the right response to the situation we find ourselves in. It respects the diversity of the Canberra community but also clearly underlies the inclusivity of this community."

Clarification: An earlier version of this story said schools could still discriminate against gay students and teachers in limited circumstances under this bill. This was incorrect. Sexuality is a protected attribute under this draft legislation.