The phrase is often associated with the idea of a sacred or holy space, such as a church or temple, where it is believed that only good and positive things can exist. It can also be used more broadly, to refer to the inner sanctuary of a person's soul or mind, which is considered to be a place of purity and innocence.
The opposite of this phrase is "nothing good can dwell in this temple," which would mean that only negative or harmful things can exist within a certain person or place. This is often used in a derogatory way, to suggest that someone or something is evil or corrupt.