Local councillors and candidates will be free to solicit big donations, with the state government backing away from plans to introduce a cap.
The backflip comes as the state government awaits the conclusion of a corruption investigation into land deals involving the City of Casey in Melbourne's outer south-east.
The Andrews government will introduce new laws in state parliament on Wednesday requiring mandatory governance training for councillors and single-member wards at most councils.
It says the reforms will set better standards for council behaviour.
But the overhaul will not include a crackdown on donations to local government candidates promised earlier this year, which included a $1000 cap and a ban on foreign donations.
Donations to councillors are currently uncapped and hundreds of thousands dollars flowed to candidates in the City of Melbourne alone at the previous election.
However, the Victorian government said it was committed to reforming council donations and would "continue to work on this matter".
The Independent Broad-based Anti-corruption Commission will hold public hearings this month into allegations of serious corruption at Casey Council relating to planning and property decisions. It has carried out a series of raids as part of the investigation.
The commission is expected to make sweeping recommendations on donations and developers' influence on politics and planning decisions at both local and state level.
The proposed local government reforms will need to pass through both houses of the Victorian Parliament. The government promises the proposed laws will bring in a more "transparent" complaint-handling system.
Councils will also be required to create policies setting out standards for hiring chief executives and they will need to seek independent advice before appointing anyone to the top job.
Compulsory training will deal with conduct standards including conflicts of interest and councillor behaviour.
Local Government Minister Adem Somyurek said the bill would make councils more accountable and democratic and help them deliver important community services.
"We've undertaken extensive consultation which has resulted in the reforms our local government sector needs to deliver better outcomes for local communities and businesses," he said.
The government is seeking to prevent the dysfunction and conflict that has plagued some councils and resulted in the sacking of South Gippsland Shire Council earlier this year.
It believes single-member wards increase accountability and ensure councillors are more accessible to ratepayers.
However, the single-ward proposal has proven controversial, with the Greens previously claiming it was an attack on the diversity of councils.
- The Age