The cashless debit card looks likely to be scrapped, after a parliamentary committee recommended the Senate vote to abolish the "harmful" scheme.
The scheme did not work and was detrimental to the autonomy of individuals, families and communities, it said.
A bill to abolish the cashless debit card, which was used by more than 17,000 welfare recipients, passed the lower house earlier this month.
Set to be debated in the Senate as early as next week, the committee also recommended the bill should address concerns about how the cashless debit card is used in Cape York.
The Queensland Family Responsibilities Commission had raised concerns scrapping it could impact the work it does in the area, particularly on the wellbeing of vulnerable clients.
The commission had recommended the cashless debit card be retained in the area, or be replaced by a new card with the same functionality.
The Senate committee said it was possible for there to be amendments to the bill to reflect the commission's concerns, noting the abolition of the card may have "an adverse impact" on operations in Cape York.
The debit cards were first introduced by the coalition in 2016 and have been rolled out to multiple communities, such as Cape York and Ceduna.
The cards allowed for up to 80 per cent of welfare payments to be placed on them that could not be withdrawn for cash or spent on gambling or alcohol.
The report said the bill would only be the first step in transitioning welfare recipients off of the cards.
"(The committee) is persuaded that the blanket imposition of mandatory income management does not work, and is in fact incredibly harmful to individuals, families and communities," the report said.
"It recognises that the principles of choice and self-determination must be central to any reform."
While the bill would move to scrap the cashless debit card, other forms of income management such as the BasicsCard would not be impacted.
"Any reform to income management must prioritise the independence and capacity of Aboriginal and Torres Strait Islander people," the report said.
"The government should look to explore options for a new technology to operationalise a tailored, voluntary income management tool that fulfils community expectations."
The opposition have called for the bill not to pass, describing the move to scrap the cashless debit card as irresponsible.
"Coalition senators have real concerns that if this bill is passed, especially in the absence of any substantive alternative measures of support, it will lead to adverse outcomes for those communities that are most vulnerable," a dissenting report said.
The committee's deputy chair, Greens senator Janet Rice, said it was "not enough" to scrap the scheme and all compulsory income management needed to be stopped.
"Compulsory income management has consistently failed to benefit those it was imposed on, and has instead had a demonstrably harmful impact," she said.