"This exemption should not apply if the collection use or disclosure of information would be highly offensive."
It also called for a further amendment to the Privacy Act ensuring others cannot share the offensive images.
Another recommendation called for the establishment of a national 'Do Not Call' register to give households greater power to stop unwanted telemarketing calls.
The Marketing Association currently operates a register of people who do not want to receive telemarketing - but companies do not have to adhere to the scheme.
New consumer legislation making it mandatory for companies to comply with the register should be introduced, the Law Commission report said.
"The Commission thinks that privacy issues in relation to online marketing and responses to these issues overseas should be monitored to see if further action is needed in this area."
More than 200 million people have opted into a national Do Not Call register established in the US, figures from the 2010 fiscal year show.