The investigation turned up many cases of home-based childcare operators and educators collecting social security payments at the same time, without declaring their income.

"It is clear from the significant amount of undeclared income identified ... that there are a number of individuals and organised groups who are deliberately trying to cheat the welfare system," Human Services Minister Marise Payne said. "In several cases, welfare recipients who are also family day care operators and educators are using the same accountants to both hide income and claim exorbitant expenses under the guise of providing care for children."

A spokesman for Senator Payne said a number of tip-offs had led to the investigation after previous busts on undeclared income in the fruit picking industry, taxi drivers and online businesses.

The spokesman declined to say how many welfare fraud cases were located in the Illawarra, citing privacy reasons.

The investigation crossmatched data from the Department of Education and the Department of Human Services and worked closely with the Australian Tax Office and banks to identify offenders.

The federal government has introduced legislative changes to help enforce compliance in the childcare sector but not everyone is happy about the new laws.

Under the changes, family day care educators with young children will no longer be able to access family day care for their own children, even if there is no other alternative form of approved childcare available to them.

The move is designed to stop home-based educators "swapping" each other's children in order to claim Commonwealth childcare payments for their own children.

Family day care workers are allowed to care for their child at the same time and place as they are offering professional care.

However, their child is counted as one of the maximum four children an educator is allowed to care for at any one time and there is no government rebate for them.

Family Day Care Australia lambasted the moves.

"Recent regulatory change that restricts family day care educators from placing their own children in family day care encroaches on the human rights of Australian parents," Family Day Care chief executive Carla Northam said.

"This is a direct attack on family day care educators' right to work, the vast majority of whom are women, and the children's rights to access early childhood education."

Shellharbour City Family Day Care employee Holly Casey agreed with some parts of the new legislation but said others made it harder for educators.

"It comes down to people doing the wrong thing by placing their own child with another educator and doing a swap to get the government rebate while collecting fees so it's good that kind of thing gets shut down," she said.