Families would be up to $8000 a year worse off under the Commission of Audit's plan to slash spending on welfare, with some losing all their assistance to raise children.
As well as cutting family payments, the commission has urged the Government to means test childcare assistance and make Tony Abbott's paid parental leave scheme less generous.
Although the commission found the Family Tax Benefits system was growing slower than other areas of government spending, it still made up 5 per cent of the Federal Budget and was forecast to grow from $19 billion to $22 billion over the next decade.
It urged the Government to lower the upper income cut-off for Family Tax Benefit Part A and squeeze families out of the system as their incomes rose.
A family with two children under 13 would lose FTB-A when their income hit $99,220, compared with the current $112,785 cut-off.
The commission also backs cutting the FTB-A payment rate for second and subsequent children to 90 per cent of the single child rate. Another recommendation is to axe John Howard's cherished Family Tax Benefit B for stay-at-home mums because it discourages women from working.
According to the commission, the changes would mean a family with two young children and a sole breadwinner on $100,000 a year would lose all their $8077 in family payments.
Even a family with a joint income of just $50,000 a year would have payments reduced $3308 a year to $9844.
The Prime Minister pre-empted the commission to an extent this week by reducing the income threshold of his paid parental leave scheme to $100,000 a year.
However, the commission believes the cap should be set at the rate of average weekly earnings, currently $57,460 a year. That would limit the payment to $28,730 for the 26 weeks leave taken by a new parent.
The commission believes the 1.5 per cent levy on big business to fund the PPL scheme should be kept, with savings from making the scheme less generous poured into child care.
It says subsidised childcare fees should be available to all families, but argues the system can be streamlined by rolling the existing Childcare Benefit and Childcare Rebate into a single means-tested payment.
It suggested an annual cap on assistance of 80 per cent of the annual cost (about $12,000 a year per child) for lower income families, tapering to a base rate of 50 per cent, or $7500, for wealthier homes.
Parents should also have wider choice on child care, with the new payment able to cover fees for those not now subsidised, such as nannies.
Mt Hawthorn couple Angela Smales and Paul Steer stand to lose about $4800 in family payments.
Last year, Mr Steer worked as a fitter and turner while his partner stayed home to look after children Ella, 7, and Josh, 8.
Mr Steer had cancer treatment over the past few months but plans to resume work soon.
His income was about $80,000 last year. He said any loss of benefits would be a blow. "We scrape by as it is," he said.
Ms Smales was devastated to hear the benefits could be cut.
"I get Family Tax Benefit A and B and we rely on those to pay the bills," she said.