Some Australian winemakers have been caught rorting millions of dollars from the federal government.
Parliament was told on Thursday that some producers were changing their structure to take advantage of a tax rebate on the sale of certain wines.
It has led to the excessive production of grapes and low-value wine, according to the industry.
"These behaviours have contributed to distortions in the wine market and necessitated urgent reform," Small Business Minister Michael McCormack said.
The government has introduced new legislation to close any loopholes and ensure the rebate is benefiting those for whom the scheme was intended.
It aims to crack down on 'virtual winemakers', who sell bulk and unbranded wine, from accessing the rebate. Under the tightened rules, a winemaker must own an interest in a winery and sell labelled wine domestically.
The changes are expected to save $300 million over four years.
The rebate cap will be lowered from $500,000 to $350,000 from July 1, 2018 and eligibility rules changed.
A producer will need to own at least 85 per cent of the grapes used to make the wine, and will have to sell wine packaged in a container smaller than five litres and with a registered trademark.
Containers for traditional cider and pear cider, which can also access the rebate, must not be bigger than 51 litres.
"This will address schemes where the rebate is being claimed multiple times on the same parcel of wine," Mr McCormack said.
The bill will also aim to stop winemakers who claim the rebate online but ultimately sell the product for export.
"(It) will better target the rebate to wine producers with proven investment in the industry, regional areas and brands, and reduce distortions in the wine industry putting the industry in a stronger long-term position."
The federal government is also introducing a program in 2018/19 to allow producers who exceed the cap to access a grant of up to $100,000 for their cellar door sales.