Premier Daniel Andrews vowed to take a hardline approach to help restore public faith in the parliament, which was badly shaken following revelations in The Age that former Speaker Telmo Languiller and Mr Nardella claimed a lucrative "second residence" allowance to live on the Bellarine Peninsula, away from their electorates in the western suburbs.

Mr Andrews said, if Mr Nardella continued to refuse to repay the money, the parliament would take the extraordinary step of introducing retrospective legislation to recover it.

It remains unclear how this legislation might work, although senior Labor sources insist it would carry legal clout.

"If he does not pay that money back before these bills come into the parliament in just a couple of months time ... the parliament will take that matter out of Mr Nardella's hands and we will recover that money," Mr Andrews said.

"All fair-minded members of parliament will vote together to get the refund that Mr Nardella should repay himself."

Mr Nardella has been repeatedly asked to return the money - and has so far been unwilling to do so. On Monday Mr Nardella did not respond to The Age's attempts to contact him.

Mr Languiller quickly agreed to repay almost $40,000 after The Age made his claims public.

Mr Andrews said he believed the money could be recovered from Mr Nardella, even if he quits the parliament.

"If you are going to make a retrospective change, which is what I am basically foreshadowing, then whether you are in the parliament or not that won't really matter," he said.

Monash University politics lecturer Dr Zareh Ghazarian said the move to legislate appeared to be "the politics of retribution".

"I can't think of any other example where this has occurred," he said.

"This will forever be known as the Nardella bill. He's going to be noted in history as one of the important cases that people will look back on."

He said the legislation should be broad enough to deter wrongdoing by other MPs but stressed it should include clear conditions such as a recent starting time - particularly if the legislation was retrospective.

"There may be cases of old parliaments having had similar things," Dr Ghazarian said.

Mr Andrews said it was time to replace Victoria's "inadequate, outdated and confusing" expenses system with new rules "to ensure parliamentary standards are in line with community expectations and current professional practices".

Under the changes:

• The second residence allowance - renamed the "Parliamentary sitting accommodation allowance" - will only be available for MPs who represent regional seats outside an 80 kilometre radius of Melbourne;
• MPs caught out doing the wrong thing will face a penalty equivalent to 25 per cent of the wrongly claimed amount;
• MPs claiming the allowance will be forced to hand over evidence to back their claims and will need to be enrolled to vote in their claimed principal place of residence;
• A commercial vehicle travel allowance open to MPs in large regional electorates will be restricted to air travel only; and
• MPs will no longer be allowed to "roll over" a $10,000 annual travel budget from one year to the next, and spouses will no longer be funded.

The government will also set up an independent remuneration tribunal to set salaries and allowances for MPs, senior public servants and other office holders.

The tribunal will review existing salary allowances and car allowances. It will also set the value of the electorate office and communications budgets.

Opposition Leader Matthew Guy said Mr Andrews had let Mr Nardella off the hook by allowing him to stay in the parliament.

"Daniel Andrews has given Don Nardella a leave pass on the eve of Anzac Day to try and cover up his protection racket for this rorting MP," Mr Guy said.

"Not only should Mr Nardella pay the money back, he shouldn't be in parliament."

Special Minister of State Gavin Jennings said the tribunal's decisions would apply from the next Parliament, meaning MPs will "never again" have a say in determining their own salaries and allowances.

Parliamentary travel allowances will be consolidated from four to a single allowance for MPs. For the first time, documentary evidence will be required, with additional scrutiny for claims beyond 68 nights a year in Melbourne.

And for the first time, all allowances will be published on the parliament's website every three months.

Mr Andrews said it was unacceptable that parliament currently had no ability to recover payments that breached the rules.

Under the changes, a new parliamentary integrity adviser will also be established to advise and educate MPs on the use of parliamentary allowances and the obligations to disclose their financial dealings in the register of members' interests.