Under legislation introduced to the NSW parliament on Wednesday, a new criminal offence of delivering a conversion practice will carry a penalty of up to five years in jail.
Civil redress will also be available to survivors of formal or informal practices that treat LGBTQI people as requiring treatment or being disordered.
The redress scheme was a critical element for survivors whose faith and sexuality were often of equal importance in their lives, independent MP Alex Greenwich said.
"It's so important that we have a process to allow mediation and conciliation to ensure people can continue to be part of their faith community throughout this process," he told reporters on Wednesday.
The government legislation, modelled on a bill by Mr Greenwich and laws interstate and overseas, has stronger exemptions for religious practices including a non-exhaustive list of permitted actions.
That includes religious teachings and parents discussing sexual orientation and gender identity matters with their children.
Different from Victoria and Queensland, the criminal offence would require proof of harm caused to the victim, Attorney-General Michael Daley said.
While loathe to rule in and out hypothetical practices, he said it would remain legal for a religious leader to preach to a group that "in our faith, being a homosexual is wrong and it's a sin and you can go to hell".
"That's not a conversion practice," Mr Daley said.
"Sitting down with someone and directing that practice to them with the intention of 'praying the gay away' - that is."
NSW Attorney-General Michael Daley said the criminal law would require proof of harm to the victim. (Bianca De Marchi/AAP PHOTOS)
The bill follows extensive consultation with 150 stakeholders.
Religious advocates said the bill was a genuine attempt by the premier, the attorney-general and Multicultural Minister Steve Kamper to balance stakeholder interests while meeting an election commitment.
"While the bill is not perfect, our communities' concerns have been heard," Faith NSW chief executive Murray Norman said.
Former preacher turned survivors' advocate Anthony Venn-Brown said he had worked with more than 4000 survivors, some of whom had taken their lives due to the effect of gay conversion practices.
"This legislation will not only protect LGBT people from psychological harm, it will save lives," he told reporters.
Another survivor, Tim Pocock, said he had been subjected to gay conversion therapy as recently as a few years ago in his 30s, having also endured it in his teens and 20s.
"(It's) a bill of protection - protection that is desperately needed to safeguard the lives of vulnerable and voiceless people, most of whom are too young and too entrenched in ideological systems to stand up for themselves," he said.
The coalition, which went to the 2023 election promising to ban conversion therapy, said it would consider the bill but complained it was locked out of discussions about its development.
"And yet we are being asked in these circumstances to form a response to the bill within a week," shadow treasurer Damien Tudehope said.
The current sitting fortnight is the last until May 7.
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