"To make good policies, for the government to do its job properly, it needs to have the right data," she told reporters in Sydney on Friday.

"It needs to have the evidence on which to base the decisions that it makes."

This included the government's 10-year LGBTQI health and wellbeing plan, which would be "ineffective if we don't include everybody", Dr Cody said.

"The national census, it's all of Australia ... so that includes LGBTQI+ communities," she said.

Equality Australia CEO Anna Brown welcomed the decision to add sexuality but said the government should not pick and choose who was counted.

She said a question asking what someone's current gender was on top of what sex they were assigned at birth would capture how many trans people were in Australia.

"One in two transgender young people attempt suicide," she said.

"This is a really vulnerable community - the government should be doing everything it can to capture data about trans and gender-diverse people in this country."

Labor pledged to "discontinue the practice of randomly assigning non-binary people and intersex people as male or female" in the census in its 2023 national policy platform.

Demographer Liz Allen branded Labor's initial push to stop the question from being included as an unprecedented moment in the interference of an independent statutory authority.

Letting the Australian Bureau of Statistics work independently would have avoided prolonged scrutiny over something that really is just a mundane statistical collection that understands the family photograph of Australia, she said.

Dr Allen said Labor's explanation to scrap the question was "unclear and incomplete" after senior ministers said it was made to avoid a divisive and harmful debate.

"The idea that we were trying to avoid division, that's exactly what we have got - perhaps in a more harmful way because now it has been brought to light," she told ABC TV on Friday.

Ms Brown criticised any suggestion data collection was divisive.

"Frankly, it's absurd and offensive to suggest that LGBTQI people's existence is somehow a threat to our society," she said.

"We were quite staggered by those comments."

Prime Minister Anthony Albanese used the annual LGBTQI awareness day Wear It Purple to announce that "one question about sexuality, sexual preference" would be included in the 2026 survey.

Respondents have the option not to answer the question. 

He said it was "a common-sense outcome" that reflected society's changed values.

"In 2024 or 2026, the world has changed ... people's sexuality wasn't as open or as accepted as it is today," he said. 

Liberal MP Bridget Archer said it was frustrating Labor had created controversy where there was none.

"I don't think anybody was thinking about it, talking about it, concerned about it until the government told them they should be concerned in some way by deciding not to go ahead with it," she said.

Opposition Leader Peter Dutton chastised the prime minister's changing position after a handful of Labor backbenchers broke ranks with the leadership and publicly called for the question to be included.

"He tells different audiences different things ... the PM is all over the shop at a time when we need certainty," he told reporters in Tasmania.

Asked whether the question should be included, Mr Dutton said "I'm fine with that if the prime minister's got a proposal".

He said the government had not approached the opposition regarding any potential legislation.

Mr Dutton previously said he was happy to leave the current set of questions and claimed adding sexuality was part of "a woke agenda".

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