Norfolk Island residents will have to pay income tax and their parliament will be replaced with a local council under a $136 million plan signed off on by Federal Cabinet.

The changes, which have been debated for years and are almost certain to be supported by the Opposition, will also give the island's 1,800 inhabitants access to Australia's welfare and healthcare systems for the first time from July next year.

"Infrastructure on Norfolk Island is run down, the health system is not up to standard and many laws are out of date", said Jamie Briggs, the Assistant Infrastructure and Regional Development Minister.

"Something has to change ... this is the first step."

The tiny island halfway between New Caledonia and New Zealand is in financial strife.

The local government currently raises money through a 12 per cent GST, but the island's economy has struggled in recent years, largely due to a downturn in tourism, and there has not been enough cash to pay for basic services.

The island owes the Commonwealth about $11 million and a recent bipartisan parliamentary report recommended scrapping the local parliament.

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"Over 20 reports have told us the situation is unsustainable", Mr Briggs said.

"This has been reported to Government since 1997 ... we are not going to sweep this under the carpet.

"The most overwhelming bit of feedback I've had is 'get on and do this'."

Bringing Norfolk Island in line with mainland Australia was a Coalition election commitment.

Under the changes, the island's Legislative Assembly will be replaced with a regional council, similar to the one that operates on Lord Howe Island, with elections to be held in the first half of next year.

A five person Community Advisory Council will be set up to manage the transition.

Norfolk Island Chief Minister Lisle Snell and Speaker David Buffett have been invited to be members.

But Mr Snell said replacing the parliament with a council is a bad idea.

"Some people on Norfolk Island, some of the residents here, will welcome this change and that is their right to do so. The regrettable part of this is that the colonial overlord master/servant system will be returned to Norfolk Island," he said.

Residents will be forced to pay personal and business taxes but not the GST, while New South Wales will be contracted by the Commonwealth to provide services.

Some residents fear 'colonial-style' rule

The island has a brutal colonial past and some residents have claimed the Government's plan could soon see them subject to "colonial-style" rule.

Last year, Mr Snell travelled to Canberra to argue against a complete takeover.

He wanted the island to join Australia's tax and welfare system but retain similar powers to a state or territory government.

"The island would be administered in the old colonial style system, where there would be an administrator appointed from afar," he said last year.

The Commonwealth has looked at revoking Norfolk Island's tax status before but was beaten by well-organised campaigns.

In 2006, Labor accused the Howard government of caving in to pressure from a Liberal-aligned lobby group Crosby Textor.

The company was hired to fight against proposed changes to the island's tax system.

But the Abbott Government believes the majority of people on the island support its changes and is confident there will not be a similar campaign this time.