Centrelink's controversial debt-recovery program will be overhauled to no longer raise debts when averaged income data from the tax office is the only evidence of the overpayment.
There will also be a sweeping review of hundreds of thousands of debts already raised where tax office data was the only evidence of a debt.
Government Services Minister Stuart Robert downplayed the changes on Tuesday afternoon, saying it was only a "refinement" of the system.
But an internal email sent to staff signaled the onus of proof would no longer be on welfare recipients to prove they don't have a Centrelink debt.
"As you know, in the past we have asked people to explain discrepancies to us," the email said.
"In the future, even if someone does not respond to these requests, we will seek more information to help us determine if there is a debt."
Mr Robert denied there was a change in the onus of proof and said the department would continue to use income averaging "with other proof points, as the basis to identify the possibility of a debt".
The announcement comes two weeks before the system was due to be tested in court, with two cases taken against the government by Victoria Legal Aid. It also comes as Gordon Legal prepares to bring a class action against the system.
An internal email told staff previous debts would be reviewed to "clarify what debt may still be owed" but Mr Robert said only a "small cohort" of people was affected and they would be contacted by the department.
Departmental figures show more than 500,000 debts have been raised in the three years of the system.
Mr Robert couldn't say how much it would cost the department if many debts were found not to be owed.
Staff were told that in the past people were asked to explain discrepancies, but in future, even if someone didn't respond to requests for information, the department would seek more information before determining if a debt should be raised.
Previous debts raised where a person didn't respond to the welfare agency will also be methodically worked through, to clarify whether a debt is still owed and for customers who are affected, their debts will be frozen.
For debts with existing reviews in process, more information will be needed "before ultimately raising a debt".
Centrelink's online debt recovery system has been in place since 2016 and matches a person's declared income to the agency with annual data reported to the Australian Taxation Office.
If more income has been reported to the tax office, recipients are required to prove they don't owe a debt to the department. Under the first iteration of the system, debts were raised against people who hadn't engaged with the department at all.
The system, dubbed "robodebt", has been criticised for averaging a person's income across 26 fortnights, which doesn't recognise casual, part-time or intermittent work, and forcing people to find years' old pay slips and bank statements.
The Australian Council of Social Service said the devil is in the detail with the announcement.
"While we're relieved to hear that the Government is finally halting the use of averaging to calculate debts, we call on the Government to replace the entire error-ridden program with a humane form of debt recovery," ACOSS chief executive Cassandra Goldie said.
"We have repeatedly warned the Government that Robodebt is grossly unfair and contrary to basic legal principles, especially the use of automated averaging to calculate debts, and the reversal of onus of proof, which has led to inaccurate assessments and people being pursued for debts they do not owe."
Rowan McRae from Victoria Legal Aid said the announcement was welcome news for her clients who were weeks away from their hearing.
"We welcome the news that Centrelink will no longer use averaging to calculate faulty robodebts. Now the Government should work with users to design a fairer, more accurate system that people can trust," Ms McRae said.
Labor's spokesman for government services Bill Shorten said the government had pretended there was nothing wrong with the system.
Greens senator Rachel Siewert, who has campaigned for changes to the system for years, said Tuesday's announcement showed the government knew the system was flawed from the start.
"I keep thinking of the hundreds of thousands of people who have been caused such distress and harm by this and that if they had listened in the first place they wouldn't have experienced this distress and harm," Senator Siewert said.
"It does make me wonder what they know that we don't, in terms of legal advice, with the court cases pending."
The Community and Public Sector Union is concerned there won't be enough staff to implement the changes.
"Restoring human oversight to debt decisions is incredibly important, but the decision will mean nothing if there aren't enough permanent, properly trained staff to do this complex work," the union's national secretary Melissa Donnelly said.
"There is a huge backlog of robodebts that have already been generated and the department needs to be provided with more staff to get through this work. Robodebt has been an extraordinary mess, it will take a long time to unpick it and there's no way it can get done without proper resourcing."