Both sides of federal politics want the protections and religious schools have overwhelmingly indicated they don't need, or use, the existing right to discriminate.
But the political parties are yet to agree on how they should look in law.
The government won support in the Senate on Monday to delay a vote on a Labor bill on the issue.
Government Senate leader Mathias Cormann shut down debate on Labor's bill, as the coalition wants the legislation refined to give schools the right to conduct themselves in a way reasonably in line with their faith.
Unless Labor can change a senator's position on the issue this week, the protections won't be in place this year.
Attorney-General Christian Porter said the matter could have been dealt with on Monday, had Labor agreed with the coalition's proposal.
The government, like Labor, wants to remove a section of the Sex Discrimination Act that allows religious schools to exclude students based on their sexuality.
“We would like to see this passed now, but it has to be a balanced passage," Porter said during question time.
Opposition Leader Bill Shorten said the bill would not hurt a school's ability to teach religion or make students attend chapel.
Delaying debate on the bill enraged Labor's Senate leader Penny Wong, who shouted it was an "outrage" after being caught off-guard by the government's tactics.
She accused the government of up-ending the Senate to avoid voting on protecting LGBTI children because they were worried about losing a lower house vote, where the coalition no longer commands a majority.
"Call an election instead of lying the way you have about this issue," Wong told parliament.
She also savaged Centre Alliance's two senators for voting for the delay, telling Rex Patrick "shame on you" for siding with the government.
But Senator Patrick said there was no urgency to the bill which should be looked at by a Senate committee.
“It has been put to us that no child has been suspended or expelled from any school on the basis of sexual orientation or gender identity,” Patrick said.
“So in those circumstances, we are not dealing with an emergency situation.”
The delay was welcomed by the Australian Christian Lobby, which believes Labor's bill goes too far and that any legislation on the matter should be thoroughly reviewed.
But Human Rights Law Centre equality advocate Anna Brown said the delay was a blow to students and their parents seeking certainty before the new year.
Labor will also introduce a bill to prevent religious schools discriminating against gay staff in the first sitting fortnight of next year, Shorten said.