Collectors could be given six months to a year to get rid of items with Nazi or Islamic State symbols under a push to ban them from public display.
The federal government introduced the legislation in June and has been before the parliament’s powerful joint intelligence committee.
Under the new laws, a person could be jailed for over a year if they publicly display insignia such as the Nazi Hakenkreuz, the traditional swastika symbol appropriated by the Nazi party.
The ban will include flags, armbands and T-shirts, and will extend to posting the symbols online.
Selling memorabilia will also be made an offence under the legislation. But private ownership will not be ruled out.
The committee recommended an amnesty period on which the trading of items bearing a prohibited symbol would not be enforced.
The six to 12-month period would give collectors a window to dispose of part or all of their collections should they wish to.
“The Committee considers there is no place for the profiting from the trade of items that bear the symbols of ideologies of hate and extremism and therefore supports the offence in its current form,” the report said.
Submissions to the inquiry from Muslim groups raised concern that the Arabic words displayed on the Islamic State flag represent the central tenet of the Islamic faith.
The flag also depicts the Seal of the Prophet Muhammad which has been misappropriated by the Islamic state.
As such the committee recommended the intent of the bill may be better achieved by prohibiting symbols associated with all proscribed terrorist organisations rather than have a specific reference to the Islamic State flag.
Chair Peter Khalil said once amendments are made, the committee would support the bill’s passage through parliament.
“The Committee supports measures that prohibit the public display and trade of symbols that represent ideologies of hatred, violence and racism; which cause significant harm to many Australians,” he said.
“These ideologies are incompatible with Australia’s multicultural and democratic society.”
Nazi salutes will not be covered under the federal bill because they fall under the jurisdiction of the states and territories, despite a push from Coalition senators.
In their additional comments to the report, deputy chair Andrew Wallace, Andrew Hastie, Zoe McKenzie and senator Simon Birmingham said the argument the federal government could not make the salute a federal offence was “nonsensical”.
“The Bill simply does not address gestures like the Nazi salute,’ they said.
“To suggest that State and Territory Police are best placed to enforce a prohibition on the Nazi salute, but that federal police can enforce the display and trade of Nazi symbols is nonsensical and without foundation in law or in common sense.”
Last month, Queensland passed legislation to ban Nazi flags and tattoos, bringing it into line with other jurisdictions that have either banned or are in the process of outlawing symbols associated with the ideology, including Victoria, NSW, ACT, WA and Tasmania.