The coalition has asked Treasury to model a proposal to suspend income and corporate tax collections or offer rebates to drought-affected farmers.
Drought affected farmers could get a tax holiday under new measures to support stricken regional communities being considered by the federal government.
The coalition has asked Treasury to model a proposal to suspend income and corporate tax collections or offer rebates ahead of a government expenditure review committee meeting on Wednesday, The Courier-Mail reported on Friday.
The new drought measures aren't expected to be announced until December when the government's mid-year budget update is due.
Australia is in the midst of its worst drought in modern times as the government tried to protect its planned budget surplus.
Coalition partner the Nationals this week put up a drought relief plan with $1.3 billion of extra assistance, including $10 million in cash grants for every council in a drought zone.
The Nationals note the drought is a seminal issue for the regions and fear the party could lose votes to One Nation if the government doesn't respond.
Ex-federal National leader Barnaby Joyce says the coalition will be booted from the government unless pump more money is earmarked for drought support.
"If this drought keeps going, you've got to go ahead with extra funding, otherwise you just won't be the government," he said on Thursday.
"I know the cabinet is coming forward with a package in the coming week. This has been through the National Party's policy committee, it's been through the Nationals party room, so it's Nationals policy."
The government has already ploughed $2 billion in drought assistance into the economy and set up a $5 billion drought fund for future drought resistance projects.
Meanwhile, The Courier-Mail also reports the federal government may use its new drought package to pressure the states to suspend payroll tax on wages paid by businesses in drought-declared zones.