The proposal would let AI companies scrape as much content as they please if they strike deals with rights holders for a minimum time period.
Creators would be able to opt-out of the scheme to shield their work, but would lose out on the potentially sizeable earnings from letting bots plunder their content.
For those who opt-in, all of the money they see would depend on the agreements negotiated with AI companies.
The details come from a leaked attorney-general's department document titled 'AI on Australian terms', tabled by ACT Senator David Pocock on Tuesday.
"The government publicly is telling us one thing, but in consultation is presenting a solution which is not that thing," Senator Pocock said, brandishing the confidential paper.
"It flips the protection on copyright."
Labor has repeatedly assured creators it will not water down copyright laws to benefit AI firms, something Prime Minister Anthony Albanese stressed during a major speech in July announcing a national AI framework.
"No company should use Australian books, music, art, or news to build or train AI without the artist's control, and that includes the artist's control of the price and value of their work," Mr Albanese said.
Another option outlined in the leaked document does promise creators compensation for all of their scraped work, while also allowing them an opt-out.
But creative output is already protected under copyright law and should not require creators to intervene to shield it from AI, opposition spokeswoman Michaelia Cash said in a statement.
"Australia's existing copyright law clearly protects that work, is the correct framework for managing intellectual property and should not be watered down for AI companies," she said.
A spokesperson for Attorney-General Michelle Rowland said the government was consulting creators, media organisations and AI companies on a range of options on copyright changes.
But there are concerns Labor wants to trade away Australians' work for a shot at hosting coveted training centres, which are required to develop AI models, as well as the data centres already being built.
"The opportunity for Australia economically is enormous in collaborating with frontier companies," Deputy Prime Minister Richard Marles told the ABC's 7.30 on Tuesday.
"While we want to see this opportunity come to the country, it needs to come on terms which are in our national interest ... I actually think this can be done."
OpenAI on Tuesday threatened to ditch putting training centres in Australia and investing in renewable energy to support them if the government did not make creatives give up their intellectual property for free.
The comment was labelled blackmail by Nationals leader Matt Canavan and Greens senator Sarah Hanson-Young, while Labor frontbenchers downplayed the language insisting harnessing AI would not come at rights holders' expense.
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