Thousands of New Zealanders living "temporarily" in Australia could win residency - but only after spending nearly a decade in the country.

Internal Australian immigration documents reveal a proposed "pathway" that would allow New Zealanders living in Australia to gain permanent residency after "eight years or more".

The proposal has been presented to the Cabinet in Australia, although its status is unclear.

Permanent residency would open the door to citizenship, which is increasingly rare among New Zealanders in Australia.

Under the current rules, thousands of New Zealanders living and working in Australia will never be eligible for permanent residency, usually because they do not have in-demand skills.

While they can live indefinitely in Australia as "temporary residents", paying tax and raising their "temporary" children, they cannot get most social support available to other long-term residents.

In contrast, Australians are automatically treated as permanent residents upon arrival in New Zealand and can apply for citizenship after five years.

The discrepancy has been labelled discriminatory and even racist by opponents, who say it has contributed to increasing poverty, crime and homelessness in some Queensland communities.

Estimates of the number of ineligible Kiwis in Australia vary wildly from 100,000 to as few as 8000.

Regardless, the number is growing every year, with a record 53,676 New Zealanders moving to Australia last year.

Even those who are eligible for permanent residency usually remain on "temporary" visas out of ignorance or prohibitive costs.

Kiwi rights activist David Faulkner said the proposed "pathway" was a political quick fix; improving life for a few New Zealanders and enshrining discrimination against the rest. Most would have a long wait for eligibility.

For many New Zealand children it would be too late, as their "temporary" status meant they could not obtain university student loans.

"You would have to come over here as an eight-year-old to make it for university."

For those who were eligible, application for permanent residency cost thousands of dollars and could still be declined on health grounds, he said.

Both the New Zealand and Australian governments have pledged to develop better "pathways to citizenship" amid growing concerns about an underclass of Kiwis in Australia.

But the financial cost could scuttle any proposal. Documents show Australian immigration officials remain worried about the welfare burden of new permanent residents.

In one briefing, it is calculated the proposal could give another 15,000 New Zealanders access to Australian social welfare every year.

One official described the current immigration rules as "unfair" while another said he "regretted that neither I or the department have the ability to waive these requirements".

One of many anomalies identified were New Zealanders with "character concerns" who mistakenly gained access to Australia and settled there permanently with their families. On subsequent visits back to New Zealand some had been caught out by immigration officials and refused re-entry to Australia.

Children were of particular concern, with an official estimating 40,000 New Zealand children were living on "temporary" visas in Australia, curtailing their access to tertiary education and welfare.

A spokesman for Australian Immigration Minister Chris Bowen would not comment on the proposal but said the government was always "reviewing and improving its visa processes and pathways".

New Zealanders were not denied a pathway to citizenship available to other immigrants, but because they were allowed to live and work in Australia many mistakenly believed they would automatically qualify for citizenship.

"New Zealanders are certainly not denied a path to citizenship or are discriminated against - they have the same path as anyone else applying for Australian citizenship."