The former honorary treasurer of the federal Liberal Party wants major changes to the laws around political fundraising, saying contributions should be capped at $500, foreign donations should be banned and donors and recipients caught breaking the rules should be sent to jail.

Michael Yabsley, a former minister in the NSW Greiner government and a major fundraiser for the party from 2008 to 2010, told 7.30 that political parties need to accept that there have been too many scandals linked to political donations.

Former Liberal Party fundraiser Michael Yabsley says it is time to ban foreign donations and cap contributions at $500. ( ABC News )

He wants the Government to ban all donations made from entities, including unions, companies and third parties.

"You should only be allowed to make a political donation if you are an Australia citizen and on the electoral roll. End of story, it should be as straightforward as that," he said.

Mr Yabsley's calls come after it was revealed Labor senator Sam Dastyari received donations and payments from organisations with links to the Chinese Government.

Mr Yabsley said reducing the amount that people can donate to $500 will help to remove the "long and questionable shadow over the integrity of the democratic system in Australia".

"There should be a cap that should be put on political donations, and I'm saying that cap should be $500," he said.

"And I believe that would, as they say, pass the smell test in terms of an amount of money that is sufficiently insufficient that no one could really argue that any kind of inducement is being provided."

Sorry, this video has expired Sam Dastyari admits he should have paid the bill himself.

He said a custodial sentence for breaching the rules would be a major deterrent for those looking to go outside the law.

"I can't imagine anyone so keen to give a political donation that they would risk a custodial sentence.

"But I think, as is the case with a lot of white-collar crime, that that kind of tough penalty has to be put in place to focus the attention of those who might otherwise be tempted to get around the law one way or another."

Mr Yabsley said if his proposals were adopted it would force political parties to focus on grassroots fundraising.

"You can hear the cries from the party operators who will say, 'This will be the end of democracy as we know it. It will be a black day for democracy'. And as we know, that is absolute nonsense," he said.

"There is always the option of rolling your sleeves up, getting out there, and doing political fundraising as it was once done."

Need for small donations from large numbers: Yabsley

Mr Yabsley, who was honorary treasurer from 2008 to 2010, said he became very uncomfortable when he saw how the fundraising machine worked.

"The more I saw of it at close range the greater my concern became," he said.

"I felt that the whole process was, to put it mildly, fairly unseemly.

"I think it compromises not only donors but the parties that are receiving the money and the candidates or the members that are associated with those parties."

He believes if political parties focused on getting small donations from a large number of people that they could easily raise the amount of money they need to run their campaigns.

"A back of the envelope calculation will tell you that if 2 per cent of the 17 million Australians who are on the electoral roll donated an average of $200 each — in other words less than half of the disclosable threshold — you would altogether raise $64 million," he said.

"So any claim that this would be the end of political parties, that they will be forced to the wall, suddenly be bankrupt, is absolute nonsense."

Time to clean up 'grubby' politics

Earlier this year Mr Yabsley told Four Corners he was aware that while he was the honorary treasurer allegedly prohibited donations from property developers were made to the Liberal Party.

He told 7.30 that his proposal is partly motivated by a desire to clean up the "grubby" perception that many people have of Australian politics.

"The point is fairly made that I might be a poacher turned gamekeeper," he said.

"I think that anyone is entitled to develop concerns along the way and to be honest in relation to the situation that they've been in and to arrive at the conclusion that there should be a much better way.

"I think there are probably some very worthy gamekeepers that were once poachers."

The Government has yet to say if it will change the political donation laws, although Labor is calling for foreign donations to be banned.

However, Mr Yabsley said many party officials and politicians currently feel compromised by the expectation they will secure large donations.

"I think there would be many people who would be relieved who are actually involved in the political process, including many members of Parliament, who I think feel compromised by the duress that they are under to engage with hands on fundraising," he said.