The Commonwealth government should not compulsorily acquire copyright for the Aboriginal flag, a Senate committee has recommended.
The committee has instead floated the idea of an independent Aboriginal body having custodianship of the flag, holding responsibility for maintaining its integrity, upholding its dignity and making decisions for its use.
"A balance must be struck between the legal rights and the value of the Aboriginal flag to the copyright holder and licensees, and the Aboriginal flag's deep and intrinsic significance to Aboriginal people and their lives," the report says.
"At present, the extent to which the distress and anguish voiced by many Aboriginal people about the flag, its use and its future are being weighed in negotiations is opaque."
The federal government is in negotiations with the flag's designer and copyright holder Harold Thomas, sparked by issues around limitations on its use.
Mr Thomas, an Indigenous artist, designed the flag in 1971 and non-Indigenous company WAM Clothing owns the commercial licensing rights.
The inquiry was told Aboriginal groups have been sent cease and desist warnings from WAM Clothing after using the flag, raising concerns licensing is putting the design in a corner.
The Senate committee wants the government to aim for a model of community use that is independent of government and involves Aboriginal people.
Committee chair Malarndirri McCarthy and fellow Labor senator Patrick Dodson want the government's negotiations with Mr Thomas to be complete by January next year.
The negotiations have been going since the middle of last year and the senators fear prolonged talks will further distress and harm Aboriginal communities.
"Resolution of the current dispute in 12 or 18 months' time may be too late and may result in Aboriginal people - as some have already done - abandoning the flag," they wrote.
"A flag that has since its inception been a symbol of solidarity and struggle, of pride and protest, a unifying flag of and for Aboriginal people."
The long-running issue of copyright licensing arrangements of the flag recently came to the fore again due to the AFL.
The AFL refused to enter into an agreement with WAM this year to use the flag in the centre of the pitch for its Indigenous round, to draw attention to the issue.