The independent review, called last year after the ABC aired allegations of poor industry practices, also found individuals in the sport engaged in team driving and race fixing.
The state government has agreed with the report's recommendation to abolish industry regulator the Office of Racing Integrity (ORI) and set up a new watchdog.
Racing Minister Felix Ellis said the review found ORI has "serious issues" relating to complaints handling and a lack of policies, leadership, accountability and transparency.
"This is not good enough by anyone's standards and demonstrates what can happen when a regulatory model fails," he said on Wednesday.
The review by racing expert Ray Murrihy investigated animal welfare standards at the Sidmouth property of Yoles Harness Stables.
It found trainer Ben Yole and stable foreman Tim Yole systematically arranged for selected horses to be brought to the wash bay at the property prior to transportation to races.
The horses were tied up and fitted with blinds and earplugs before the Yoles deployed "physical and vocal abuse" including making loud noises to frighten them.
The report said this involved pulling down the blinds and earplugs and using a harness whip encased in a plastic bag to exacerbate noise.
The whip was waved around the horses and sometimes used to strike them in the rump and back legs.
In a submission to the review, the Yoles admitted to the practice but said it occurred about once a month and no physical contact was made with the whip.
They also said the practice was discontinued at least 12 months ago.
The review determined the practices constituted mistreatment of a horse, which is defined in racing rules as abusing or treating a horse "badly, cruelly or unfairly".
"Regardless of whether contact was made, such actions were directed primarily at frightening and terrorising the horses ... to induce a superior performance," the report said.
It also found horses had been given medication on race day, as well as injections either on race day or a day before, in breach of rules.
The Sidmouth property was overstocked, had insufficient drainage, inadequate shelter and entries to the horse treatment log book were "superficial".
Horses were also tied up for unduly long periods on race days.
Mr Ellis said the allegations of mistreatment had been referred to the RSPCA and Biosecurity Tasmania.
He said the state government had established an independent stewards' panel of harness racing and integrity experts to investigate and determine potential charges.
Mr Murrihy found Ben Yole and others were involved in team driving during two races in 2022 and acted in concert to give certain horses an advantage.
Mr Murrihy said a list of 15 other races featuring questionable tactics would be passed on to the government for further review.
The state government has agreed in-principle to all report recommendations, including measures to improve competition.
Ben Yole has previously denied team driving accusations and has been contacted for further comment.
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