Australia's support of veterans "requires fundamental reform," according to the Productivity Commission, but it has retreated from an earlier recommendation to abolish the Department of Veterans' Affairs entirely.
The final report said the system of compensation and rehabilitation for veterans is "out-of-date and is not working in the best interest of veterans and their families, or the Australian community".
The report called for a new commission, a single minister to oversee defence personnel and veterans, and a system that focused on lifetime wellbeing for veterans.
The system, which cost $13.2 billion in 2017-18, "is overly complex (legislatively and administratively), difficult to navigate, inequitable, and it is poorly administered (which places unwarranted stress on claimants)".
Veterans' Affairs Minister Darren Chester said he would consider the report carefully.
"I acknowledge the Productivity Commission's final report has listened to feedback from the veteran community and changed a number of recommendations made in the draft report," he said.
"In particular, the recommendation that the Department of Veterans' Affairs should be abolished has been removed, with an emphasis on the need for a standalone agency."
The draft report had called for the department to be abolished, but the final report acknowledged veteran policy could not be moved to the Department of Defence "given a lack of trust and confidence by veterans in Defence to exercise this policy role, and strong opposition to the change".
Instead it called for the creation of a Veteran Services Commission to oversee the performance of the system.
"New governance, funding and cross-agency arrangements are required to address the problems with the current system."
The report called for the system to be brought into the 21st century and focus on prevention of injuries and illness as well as rehabilitation and transition, saying some supports were "archaic".
"It should be redesigned based on the best practice features of contemporary workers' compensation and social insurance schemes, while recognising the special characteristics of military service."
Veteran policy should have a "whole-of-life" focus, the report said, calling for a Joint Transition Office to be created within Defence to help veterans as they moved to life as civilians.
It also called for a premium to be levied on Defence annually to fund the expected cost of future claims.
Treasurer Josh Frydenberg thanked those who had contributed to the report.
"This is a significant report looking at an important and complex system - it will require careful consideration by the government as well as the veteran community and other stakeholders," he said.