Australia is proposing to reduce Norfolk Island's powers of self-government, arguing the territory's current arrangements are financially unsustainable.
The Federal Territories Minister Jim Lloyd said several recent parliamentary and independent reports had suggested the territory's government was too complex and costly for such a small community to sustain.
Mr Lloyd said Australia would consult the island government and community members about two broad categories of possible future governance arrangements.
The first calls for a modified self-government model with greater powers for involvement by the Australian government.
The second involves a local government model in which the Australian government might assume responsibility for state-type functions.
The Australian Labour Party welcomes the proposals, but it suggests the government has been too slow to act on a financial assessment last year, which said Norfolk Island could become insolvent within 18 months.