Auditors have found the Australia Council spends on average a third more to administer arts funds than similar organisations.
If it had spent just one cent less in administration costs per dollar of grant funding over the past financial year, the council could have saved $1.35 million, the Australian National Audit Office says.
It spent a total of $174 million on grants programs in 2015-16.
In a report published on Tuesday, the ANAO said the council's overhead costs were relatively high - accounting for nearly half the total costs to administer a grants program.
"There would be merit in the Australia Council examining its major costs ... and looking for opportunities to drive efficiency," it said.
The report noted that while the organisation had sought to improve efficiency by redesigning its grants program, it's not clear if the changes have worked.
The council doesn't calculate how efficient it is at distributing arts grants funding nor has it carried out a risk assessment of its program.
The auditors have recommended it start to measure its efficiency and benchmark it against comparable organisations or even its own performance.