It follows a 17-year effort, spearheaded by state Veterans' Affairs Minister Guy Barnett and Sheean's family, to see Sheean recognised for his bravery in World War II.

A review of the courageous acts of Sheean and 12 other naval and military personnel was undertaken by the Defence Honours and Awards Appeals Tribunal in 2011-13, ultimately concluding that "no action be taken to award Ordinary Seaman Sheean a VC or further form of recognition for his gallantry or valour".

Last year, a further review was commenced, this time into Sheean's valour alone. After two hearings in Hobart in March 2019, the tribunal handed down a report last July, recommending that Defence Minister Linda Reynolds recommend to the Sovereign that Sheean be posthumously awarded the Victoria Cross for Australia.

But, in a move that has angered Sheean's family, the federal government has ignored the report's recommendations, choosing to deny him the ultimate military honour.

An emotional Mr Barnett described the shock decision by his federal colleagues in Canberra as "bitterly disappointing", while Sheean's nephew, Garry Ivory, said he was "gutted".

"The evidence was overwhelming in support of Teddy Sheean receiving a Victoria Cross for the most conspicuous acts of bravery and actions in the face of the enemy," Mr Barnett said.

"The decision by the federal government to deny Teddy Sheean the Victoria Cross ... in my view, is the wrong decision.

"I will be asking the Prime Minister to reconsider this decision. Because it's contrary to the overwhelming evidence that was put to the tribunal."

Sheean, who was born at Lower Barrington, was on the corvette HMAS Armidale in the Timor Sea on December 1, 1942, when no less than thirteen Japanese aircraft attacked the ship.

After helping to free a life-raft, the 18-year-old Sheean rushed to an anti-aircraft gun, an Oerlikon, firing at the swarming bombers as the ship sank after being struck by a torpedo.

He shot down at least one bomber, despite having wounds to his chest and back.

Of the 149 crew members on the HMAS Armidale, only 49 survived the attack. Sheean was not one of them.

Mr Ivory noted that the HMAS Armidale's motto was "stand firm".

"And that's exactly what we'll do," he said of the campaign for his late uncle to be honoured.

"This government put this tribunal together to look at Teddy's case on its merits and it passed all the merits. And it's gone back to the government and they've refused to act on it.

"That's an injustice to Teddy."

In addressing the Senate on Wednesday afternoon, Senator Reynolds said Sheean should not be awarded the VC due to a lack of compelling new evidence.

"It is a very difficult decision but I believe, in the circumstances, the right decision," she said.

"I must emphasise that the outcomes of the government's decision in no way detracts from the service, the bravery and the sacrifice of Ordinary Seaman Teddy Sheean."

Tasmanian independent senator Jacqui Lambie said the denial of a VC to Sheean was "just another slap in the face" for his family.

In an adjournment speech in the Senate last night, Senator Lambie characterised the decision as "shameful".

"What I don't want to do in this house is have to do [a] deal over a veteran," a visibly upset Senator Lambie said. "Because that is just disrespectful."