People taking advantage of the NDIS are being warned they will be caught after revelations taxpayer funds have been wasted on illegal drugs, cars and holidays.
As laws aimed at trimming spending on the disability support scheme cleared the lower house of federal parliament, a budget scrutiny hearing was told $2 billion of NDIS spending was not used for genuine needs.
Some providers allegedly forced participants to give cash to criminals for drugs and encouraged them to engage in fraud, with tens of thousands of dollars spent on holidays and $73,000 on a luxury car.
The fraud allegations were exposed by a government crackdown on unscrupulous crooks, National Disability Insurance Scheme Minister Bill Shorten said.
"Most participants and providers are good but there's an unacceptable proportion of fraud going on," he said on Wednesday.
"We've got to tell the truth (about the scheme), that there are spivs and charlatans."
There were 220 fraud investigations underway within the NDIS, with several billion dollars of payments being reviewed, Mr Shorten said.
"We need tighter laws, better technology and more people, and we're doing all of that," Mr Shorten said.
"Most operators are good but I tell you what, if you are a crook, we will catch you. If you are overcharging, you will get caught.
"It's going to take time, you haven't had this sort of diligence and vigilance before."
Opposition spokesman Michael Sukkar said NDIS fraud had skyrocketed.
"Genuine Australians with disabilities have seen wait times blow out, while the criminals, cartels and fraudsters are running rampant," he said.
"There are not enough prosecutions of fraud, and it's startling the government has waived the white flag on more criminal prosecutions."
The laws passed in the lower house on Wednesday aim to cut spending growth within the scheme.
Participants would be required to undergo fresh needs-based assessments for Commonwealth funding.
The laws to cap spending growth by eight per cent per year would result in funds being allocated to participants on the condition they are spent under support plans, unless needs significantly changed.
A list of services eligible for NDIS funding will also be updated.
Mr Shorten said the changes would allow the scheme to grow sustainably and be improved.
"While the scheme is doing amazing things participants do face confusion, uncertainty, and sadly, exploitation, in some cases every day whilst on the NDIS," he told parliament.
"The legislation before parliament will give us what we need to make the NDIS stronger, make it easier for participants and providers to use NDIS funding in the right way."
Under the laws, the disability community must be consulted as rules on assessments and budget measures are developed.
Laurie Leigh from National Disability Services, which represents providers, said a wholesale change was needed to reform a "broken" system.
"Training, supervision and retaining highly skilled practitioners to provide quality care is essential but not adequately covered in the current funding model," he said.
"Managing the sustainability of the NDIS is critical - the community expects no less."
