A Victorian lesbian group has won a legal appeal in its case to exclude transgender women from its public events after the federal court set aside a decision by the Australian Human Rights Commission (AHRC).

The decision on Wednesday afternoon means the case will return to the administrative review tribunal for another determination. While the Lesbian Action Group called the finding a “definite win”, Equality Australia said the judge “simply identified legal errors in the tribunal’s reasoning”.

In 2023, the Lesbian Action Group (LAG) applied to the AHRC for a five-year exemption under the Sex Discrimination Act (SDA) to allow it to exclude transgender and bisexual women from its public events, which it said were exclusively for lesbians who were assigned female at birth.

The commission ruled against the LAG, so the group asked the administrative appeals tribunal, now known as the administrative review tribunal, to overturn the decision. The tribunal upheld the AHRC last January, leading the LAG to take their case to the federal court.

On Wednesday, Justice Mark Moshinsky ordered the tribunal’s decision be set aside.

Moshinsky said that exemptions to the SDA could be allowed given that “properly construed, the word ‘sex’ in the SDA means biological sex” and because the act did not seek to eliminate discrimination “at all costs”.

Contrary to what the tribunal ruled, he found it was possible that discrimination could be “justified” if it had an overall positive outcome.

He also found the tribunal failed to regard two key principles: the “indivisibility and universality of human rights”, and that “every person is free and equal in dignity and rights”.

The historic case has been at the centre of a heated debate regarding the rights of transgender people and their freedom to associate in public, and raises legal questions about sex-based rights in Australia.

At previous hearings, the commission referred to a landmark Tickle v Giggle federal court decision, which found transgender women were women and should have access to women’s services such as LAG events.

Moshinsky said that as an appeal to that decision was before the courts, he would not take it into account.

The AHRC said the court didn’t decide whether the exemption sought by LAG should be granted or make findings about the “lawfulness or merits of the proposed events”.

“The Court ordered that those questions be reconsidered by the Administrative Review Tribunal,” the AHRC said in a statement.

“The Court confirmed that when considering whether an exemption should be granted, it was appropriate to consider the extent to which the exemption would permit discrimination.

“The Commission will review the Court’s reasons for decision. The Commission remains committed to carrying out its role independently, impartially and in line with the law, including giving proper consideration to human rights issues.”

But LAG spokesperson Nicole Mowbray told reporters outside the court that the decision was a “definite win”.

“We respect their [transgender people’s] space and their right to do what they want to do, all we’re asking is for our right to our own space to be respected,” she said.

Equality Australia legal director, Heather Corkhill, said the LAG was successful on “two technical points of legal process” and the decision was “not a ruling on whether excluding trans women is lawful or justified”.

“The court has not endorsed discrimination against trans women, and it has not decided whether the exemption should be granted,” Corkhill said.

“It has simply identified legal errors in the tribunal’s reasoning, so the matter must now be reconsidered.

“Importantly, the substantive questions about trans rights were not decided in this case.”