THE military will review its policy on transgender people serving in its ranks, declaring its old policy ''out of date''.

A Defence Department spokesman said a new policy would be developed by the end of the year and transgender people would be treated ''fairly and with respect''.

A spokeswoman for TransGender Victoria, Sally Goldner, said the previous policy had effectively banned transgender people from military ranks. She knew one serviceman wanting to become female whom the military had treated with ''outright extreme prejudice and lack of respect''.

She said it was a loss for the military that transgender people had not been welcomed.

Human Rights Commissioner Catherine Branson supported the review. She said the community did not approve of discrimination against transgender people.