The federal government, which advocates mainstreaming indigenous welfare arrangements, argues Aboriginal young people need incentives to find jobs.
From July 1, it plans to strip new applicants for the indigenous work-for-dole payment, the Community Development Employment Projects (CDEP) program, of their payments after 12 months.
Participants will then be pushed onto lower, mainstream payments and a youth rate is also set to be introduced for the first time.
Any new beneficiaries aged under 20 and living in a remote area will face a cut of almost A$60 a week when the indigenous dole is brought down to the general youth allowance rate paid to the non-indigenous jobless.
Employment Minister Kevin Andrews said the savings would be channelled into training opportunities for people on CDEP payments and he said the changes would bring indigenous people into Australia's economic fold.
But he said today's announcement was not a stepping stone to abolishing indigenous-specific welfare.
After 12 months in the CDEP program, indigenous people living in metropolitan and non-remote areas would be pushed into the mainstream welfare system.
But Labor is scathing of the government's plans, saying changes to the payment system are meaningless without better employment opportunities.
Indigenous communities need more jobs as well as assistance to improve literacy, numeracy and health levels, it says.
Under the CDEP program, the government pays the dole-level wages of indigenous people through their employers at a rate of $235.41 a week in remote areas and $212.03 in cities and rural centres.
The new regime will see people under 20 paid the standard youth allowance rate, which is currently $176.45 per week in remote areas and $167.35 in other areas.