A Liberal councillor has lost an appeal against a ruling she vilified her neighbour on the basis of his sexuality after she compared a rainbow flag he flew outside his Sydney apartment to an ISIS banner.

Inner West councillor Julie Passas was deputy mayor - installed as part of a power-sharing deal with Labor politicians - when she told Daniel Comensoli to remove the rainbow flag because it was "offensive to my culture and religion".

The tribunal found Julie Passas's position as an elected official amplified her conduct. Credit:Fairfax Media

Mr Comensoli had hung the flag over the balcony of his Ashfield unit to celebrate the "yes" result of the same-sex marriage survey the day on November 15, 2017.

In loud remarks overheard by other residents of the complex where they both lived, Cr Passas said Mr Comensoli shouldn't be able to marry "until you could breastfeed and have children".