The government has scrapped measures to let the Veterans' Affairs Department release client information after veterans voiced fears the move would open them to harassment and silence criticism.
Reforms preparing the department for digital changes passed the Senate on Monday night after it voted to strike out provisions letting the agency release personal information when "in the public interest".
Among a list of reasons the DVA's secretary could release the information included "misinformation in the community", a memorandum issued to MPs said last year.
Labor raised concerns about the changes to disclosure following controversy when Human Services Minister Alan Tudge disclosed a welfare recipient's personal information to a journalist.
Veterans opposed the measures, saying they could chill criticism and open ex-services personnel to harassment.
"This bill enables the Secretary of Veterans' Affairs to release veterans' personal information to shut down criticism of DVA by individuals or ex-service organisations," the South Lake Macquarie RSL Sub-Branch said.
Veterans' Affairs Minister Dan Tehan said the public disclosure measures were aimed at strengthening privacy protections for veterans.
"Given misinformation in the community we decided to act in the best interests of the veterans' community and remove this section of the bill," he said.
After the government cut the disclosure measures, the Senate passed a bill preparing the agency to adopt more digital programs.
The DVA won't be able to use computer programs to find against veterans' compensation claims after a separate amendment was passed.
Decisions adverse to clients must be referred to a person authorised to consider and make a determination on a claim.
Senator Jacqui Lambie said the legislation prevented the programs from making wrong decisions in rejecting claims for liability.
"This is a clear win for veterans as their privacy would continue to be protected, while the claims process will become more streamlined with the introduction of ICT," she said.
The agency has drawn heavy criticism from veterans, who have blasted its claims system as adversarial and rife with delays.
A Senate inquiry into suicide by ex-services personnel is investigating the progress of agency reforms, and how it assesses claims.
The department is planning to reduce claims processing times through planned business and ICT changes, in line with the government's digital transformation agenda.