At least 2000 asylum seekers could to be housed in tents on Nauru for up to five years and some of them could eventually be resettled in New Zealand.
The plan would be enacted by the Coalition if it wins the general election in Australia.
The Australian newspaper reports on Tuesday at least 2000 people would be sent to a new camp.
Coalition immigration spokesman Scott Morrison said on Monday during a tour of potential sites on Nauru that the island could take around 5000 asylum-seekers over time, in tents and other permanent facilities, the paper said.
Mr Morrison said some asylum-seekers may end up in Australia, but with "no guarantee", many could be resettled in countries such as Canada or New Zealand.
"Nauru has always been the coalition's preferred and first site for offshore processing," he told The Australian.
"We will use whatever additional capacity is created by PNG obviously, but Nauru still remains our plan A when it comes to offshore processing."
AAP reprots Immigration Minister Tony Burke agrees the idea has merit, and is one he discussed with Nauru's leadership last week.
"The concept of expanding the facilities on Nauru is a similar conversation to what I had," he told ABC Radio on Tuesday. "To build capacity there as well makes sense."
