It is the first time in decades that an Australian government has lost a vote on a substantive piece of legislation, sparking applause and cheers from observers in the parliamentary viewing gallery in Canberra.
The 75-74 vote - which came on the first sitting day of parliament this year - is a blow to the already embattled prime minister and raised questions about whether he can remain in office.
The fast-tracked medical transfers law will only apply to refugees and asylum seekers already on Manus Island and Nauru.
But because it was amended in the House of Representatives on Tuesday, it returned to the Senate for another vote on Wednesday. The government of prime minister Arthur Fadden lost a symbolic budget vote in 1941 and immediately resigned.
"If they don't come, it will be because of the work and the decisions we are now taking and the actions we are putting in place", Morrison said.
Scott Morrison is significantly ramping up border security patrols and reopening Christmas Island to guard against a feared influx of asylum-seeker boats.
Under a harsh policy meant to deter asylum seekers from reaching Australia by boat, Canberra sends arrivals to the camps for processing and barred them from resettling in Australia.
The Prime Minister pledged to reverse the laws if the Coalition is re-elected at the poll expected in mid-May.
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No matter the detail of the medical evacuation Bill passed by Parliament tonight, the Labor Party can never win a political fight on border security.
Refugee advocates applaud the law that they regard as a more humanitarian approach toward asylum seekers.
The changes included a provision that only the 1,000 asylum seekers now held on Nauru and Papua New Guinea and not any future arrivals would be considered for medical evacuation under the new regime.
"I believe that we can keep our borders secure, we can uphold national security but still treat people humanely", Shorten told Parliament.
Scott Morrison remains defiant after the medical refugee transfers bill was passed today, warning the new laws will weaken Australia's borders.
Section 53 is "non-justiciable" and therefore a court will not decide if a law is valid, meaning the government can not challenge the medical transfer bill in the High Court. "In the a year ago alone, we have had to take court action repeatedly to help secure the medical evacuation of 26 ill people on Nauru, many of these children".
"I'm standing between people smugglers and bringing a boat to Australia", he said.
The federal opposition is introducing amendments to overhaul existing laws, lifting jail time for corporate crimes from 10 to 15 years and more than doubling the proposed cap on financial penalties.