Under the proposal about 50 crocodile safaris a year would be allowed in the Northern Territory, where the giant reptiles have become increasingly common since they were declared a protected species in 1971.
Australian Environment Minister Greg Hunt said the federal government had considered allowing "trophy hunts" but did not believe they were appropriate.
"My view is that there was a risk of cruel and inhumane treatment," he told reporters. "That was, in my view, inappropriate."
They also said that hosting big-spending trophy hunters would provide a valuable source of income for the impoverished Aboriginal communities who live in the regions where most crocodiles are found.
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Conservation groups opposed the plan, saying allowing hunters to blast away at native wildlife would send the wrong message in an area heavily reliant on eco-tourism.
Saltwater crocodiles, which can grow up to seven metres (23 feet) long and weigh more than a tonne, are a common feature of Australia's tropical north, with their population estimated at over 150,000.