Welfare recipients will now report income as it appears on a payslip rather than estimating a figure based on hours worked over a fortnight.
Legislation passed the Senate on Thursday making changes to Centrelink reporting expected to save the federal budget $2.1 billion over four years.
People reporting income to Centrelink currently have to estimate a figure based on how many hours worked in a fortnight and rate of pay, taking into account penalty rates.
Under the new system, which will come into place in July, welfare recipients will be able to enter details on their payslips.
The changes would also allow welfare recipients' employment and income data to be pre-filled online, the same as tax returns.
The government hopes Centrelink payments will become more accurate, preventing people being owed money or paid too much.
Labor amended the bill to include a one-year review of the new system, meaning it will return to the lower house for final approval.
An online portal will be set up to help people with the change, with videos and written examples to help explain the system.
The changes will impact about 550,000 Australians.
The bill also marks the start of single-touch payroll for welfare recipients.
That means a person's income data from the Australian Taxation Office will be automatically uploaded to the government system so bureaucrats can double-check figures.
It comes after the government's robo-debt debacle saw many people served with notices for money they didn't owe.
The system, which has now been wound back, was recently declared unlawful by the Federal Court and is the subject of a separate class-action lawsuit.
Australian Associated Press