Low-income earners could get 90 per cent of their childcare payments subsidised under a plan to overhaul the sector and encourage more parents to return to work.
The Productivity Commission's child care and early childhood learning draft report, to be released today, also recommends parents who use qualified in-home nannies be eligible for childcare benefits.
But it rebuffs Prime Minister Tony Abbott's paid parental leave proposal.
The 870-page draft report also recommends replacing the multiple-subsidy system with a single, income-tested payment.
This would replace the childcare benefit, which gives low-income earners up to $200 a week, and the childcare rebate, which covers 50 per cent of out-of-pocket expenses up to $7500 and is available to all families.
The commission's preferred option is for a 90 per cent rebate for families on $60,000 or less, tapering to 30 per cent for families on more than $300,000.
Rebates of 50 per cent or higher would apply only to families earning $220,000 or less, leaving some high-income earners worse off.
The commission found that despite Federal childcare funding ballooning to $7 billion a year, many parents still struggled to find suitable care and costs were "increasing at an unsustainable rate".
In a blow for Mr Abbott's PPL scheme, the commission said it was unclear whether it would bring significant additional benefits.
Instead, it suggested the money be diverted to child care "where more significant family benefits were likely".
The PPL scheme, which faces opposition from inside and outside the Government, would give new mothers their full wage for six months to a maximum of $50,000.
Commissioner Wendy Craik believes the recommendations, which include a push for higher subsidies for children with disabilities and additional needs, would result in 47,000 mothers returning to work.
Australian Nanny Association president Danielle Robertson hoped the Government would take the recommendations on board. "It's about giving parents a choice and the flexibility to have child care at home," she said.
Perth doctor Julian Rodrigues employs nanny Larissa Dickson. He said he spent about $8000 a year on before and after school and holiday care for Emilia, 8, and Rafael, 10. His work commitments meant at-home care was the most suitable option.
"If I could save $4000 a year I could spend the money on the kids," he said. "The current situation is ridiculously unfair."
Childcare Minister Sussan Ley said the draft report was the next step in a once-in-a- generation opportunity for reform. The final report is due in October.