People with unpaid fines should not be imprisoned but instead work off the debt, an influential government body has recommended.

The Australian Law Reform Commission (ALRC) is examining ways to reduce the staggering number of Indigenous people behind bars.

In a discussion paper, the commission said states and territories should abolish laws that imprison people because of unpaid penalties.

"Imprisonment for fine default results in punishment disproportionate to the offending conduct," it said.

The commission suggested the introduction of so-called work and development orders.

The orders exist in New South Wales and allow people to work off infringements through community work, medical treatment or education, including driving lessons — for people fined for driving while unlicensed, for example.

"Aboriginal and Torres Strait Islander peoples are over-represented as fine recipients and are less likely than non-Indigenous people to pay a fine at first … and are consequently susceptible to escalating fine debt and fine enforcement measures," the ALRC wrote.

"A person with unpaid fines may have their driver licence suspended and may ultimately be imprisoned for driving while disqualified."

Quarter of prison population Indigenous

Despite making up just 3 per cent of the general population, about a quarter of Australia's prison population is Aboriginal or Torres Strait Islander.

Attorney-General George Brandis instigated the wide-ranging review last year and it is led by Gadigal-Wirradjuri judge Matthew Myers.

The commission said issues related to a person being Aboriginal or Torres Strait Islander should be considered when deciding on bail.

"[Indigenous people may be] subject to bail conditions that have potential to conflict with cultural obligations and increase the likelihood of breach," the paper said.

"This [proposal] may decrease the number of Aboriginal and Torres Strait Islander people accused of low level offending who are held on remand."

The ALRC also recommended prison programs, such as education courses or rehabilitation services, be made available to accused people held on remand but not yet convicted.

'Special hearing processes' proposed

At least 100 Australians with cognitive impairments are being detained indefinitely because they were deemed mentally unfit to stand trial.

It is estimated about half of those people are Indigenous.

The commission proposed states and territories impose "limiting terms through special hearing processes", as already occurs in NSW, South Australia and the ACT.

"The length of a limiting term represents the sentence of imprisonment a court would have imposed for the offending conduct, if the person had been found guilty at trial."

The commission has been told people with cognitive impairments were going through the court process — despite being unfit to stand trial — rather than risk being indefinitely detained.

Submissions to the inquiry close in September and its final report is due in December.