The AFL has ruled that Mouncey is ineligible to be drafted in Wednesday's AFLW draft but it is understood she will still nominate for next year's draft.

It is understood Mouncey will not take legal action against the AFL, having heard the news 15 minutes before the AFL published a statement ruling her out of contention.

Mouncey is set to continue to play with Ainslie in the AFL Canberra competition next year and will likely nominate for the AFLW draft in 2019 where she would have to go through a similar process.

The AFL based its decision on the Victorian Equal Opportunity Act, which states that athletes can be discriminated against based on their sex or gender "if strength, stamina or physique is relevant".

???A subcommittee comprising of AFL Commissioners Jason Ball, Gabrielle Trainor and major general Simone Wilkie, AFL general manager inclusion and social policy, Tanya Hosch and AFL general counsel and general manager game development, Andrew Dillon, reviewed Mouncey's nomination.

The subcommittee's decision took into account the stage of maturity of the AFLW competition, its current player cohort and Mouncey's individual circumstances.

"While I am disappointed with the AFL's decision regarding my participation in the AFLW draft, I accept the league's decision and thank them for the genuine way in which they approached my situation," Mouncey said in a statement.

"Despite not being able to take part in the draft, I note that while I am not able to compete in the AFLW this season, the AFL has given me the all clear to play for Ainslie next year in the AFL Canberra competition for which I am very grateful and look forward to doing in 2018, before hopefully being able to nominate for next year's draft."

AFL general manager for inclusion and social policy Hosch said: "Hannah's passion for football is undeniable, and I want to thank her and her team for their constructive participation in the decision-making process.

???"The AFL has made very strong commitments to equality and inclusion at all levels of the game. We recognise that participating in sport has physical, psychological and social benefits and we are committed to making Australian football on every level welcoming to all in our community."

Mouncey has represented Australia, as a male, in European handball but has transitioned to a woman over the past two years.

The 27-year-old has been approved to play handball in both domestic and international competition, with opportunities to represent Australia on the horizon for next year.

She starred in Canberra's women's AFL competition in 2017 and nominated for the national draft after her performances attracted interested from several AFLW clubs.

Mouncey has already trialled with Melbourne and Victoria loomed as her most likely destination if she was to be scooped up in the draft.

The AFL has known for months that Mouncey had intended to and then had nominated for the AFLW draft but took until the day before the draft to hand down its verdict.

The AFL Players Association has called on the governing body to develop a proper policy in relation to the eligibility of transgender footballers.

"No athlete should face such confusion around their eligibility for an elite competition just days out from a draft," the statement read.

"We have urged the AFL to prioritise the development of guidelines detailing the process and parameters for entry into the AFLW competition, so that Hannah and any other players have a clear understanding of their eligibility."

The AFL follows International Olympic Committee regulations which state an athlete must prove their testosterone level is below 10 nanomoles per litre, a requirement which Mouncey comfortably meets.

Australia's most well-known transgender woman Cate McGregor has previously thrown her support behind Mouncey, and she says the AFL must now brace for legal trouble after she was denied.

The AFL threw its support behind same-sex marriage last month and McGregor said denying Mouncey now would leave the governing body with egg on its face.