The elderly will no longer be forced to sell their homes in a "fire sale" to pay a bond - as high as $1 million - for aged care. Instead they will have the option of paying ongoing rent.
And, under the new plan, older Australians will be able to sell their homes without fear of losing their age pensions.
The sweeping generational reforms, which have been developed by the Productivity Commission, focus on helping people stay in their homes longer - and saving taxpayers billions of dollars into the future.
Australia now spends about $11 billion a year on aged care - tipped to rise to $55 billion by 2050 with the ageing of the baby-boomers.
The proposal aims for long-term reform, establishing a user-pays scheme with wealthier Australians paying more for their care and a safety net for those not as well off.
Wealthier people could pay up to 25 per cent of the cost of their care, either at home or in an aged-care facility, capped at $60,000 over a lifetime.
The report also called for a lifted cap on the cost of accommodation in high-care nursing homes. Currently the maximum charge is the same with no differentiation based on room size, number of occupants and amenity.
"Older people would be able to choose the standard of accommodation that they want and could afford, just as they have done when living in the community," the report says.
Prime Minister Gillard yesterday described the plan as promoting "major and profound reform".
Ms Gillard said the Government would consider it, but was committed to structural reform in the current term.
"We will also want to see a system that offers more options than the past has, a system that is financially sustainable and is fair for those being cared for as well as for the rest of society, and a system which meets the highest standards of quality," she said.
The chief executive of SA-based aged-care provider ACH Group, Dr Mike Rungie, said if the recommendations were adopted "it will make the aged-care system simpler, fairer and much easier to navigate".
"The report reflects what older people have been telling us for some time - that they want to be able to live a good life, continue to work and contribute, stay at home, and that they are in the best position to choose and control the care services they require, where they get those services and who provides them," he said.
Council on the Ageing national chief executive Ian Yates said older Australians were familiar with "the difficulties of accessing care services through a rigid system which fails to meet their needs".
"For many Australians, their homes are their major lifetime investment," Mr Yates said. "The introduction of a fair funding structure will ensure the system works and can be sustained to address the growing needs of our ageing population with government still paying the bulk of the costs."
However, retiree Raylee Wundersitz was not happy with the proposal.
Mrs Wundersitz, 68, who lives with her husband Ross at Seaton, thought it would unfairly penalise people who had worked hard all their lives.
"We have worked all of our lives and gone without overseas holidays to pay mortgages.
"Some have opted out and are living lavish lifestyles. They seem to be the ones getting welfare while some are going to have to continue to provide for themselves."
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