The ad, released on youtube on Friday, shows a flamboyant dancing priest leading a congregation in a sing along accusing the Catholic Church with its "sleazy priests" of "making the world less good".
Despite the ad taking explicit and direct aim at the Catholic Church, Sex Party officials say it is meant to highlight the party's policy of ensuring that religious institutions are transparent and accountable in Australia.
"The creative team needed to choose one particular religion," media spokesman Jorian Gardner told The Huffington Post Australia.
"Also, (party leader) Fiona Patten has had a long standing history with the Catholic church," he added, pointing to Patten's role in the production of the 2000 booklet about the Church, called Hypocrites.
Australian Sex Party senate candidate Dr Meredith Doig said there was distinction between religion and charity, saying the party is not talking about church schools or hospitals.
"They can get charity status under 'Advancing Education' or 'Advancing Health' or 'Alleviation of Poverty,'" said Doig," he said.
He said the party was talking about what he termed "cults" such as Scientology and Hillsong, which Doig said raked in nearly $80M last year from operations like Hills Christian Centre, Hillsong Technology Services and Hillsong Publishing.
"They exploit this tax loophole to run businesses that otherwise would be subject to normal taxation."
"Humour and music are often the best ways to communicate a serious message -- it's time for religion to pay their way. I pay my tax -- why don't they?"