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This article is from the soc.culture.australian FAQ, by Stephen Wales with numerous contributions by others.

12.3.6 Origin of "Dunny"

[LC] I was using the toilet the other day and noticed that the
brandname stamped on the porcelain was "Dunedin". Could this be the
origin from which the endearing term "dunny" is derived ??

[IR] Unfortunately no. The Macquarie gives: "short for Brit. d.
dunnakin, dunnaken, from dannaken, from danna (dung) + ken (place)"

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