The royal commission into the scheme continued on Tuesday, hearing the department avoided a Federal Court hearing that would have ruled on the legality of its income-averaging practice.

Income averaging was a debt collection method that compared people's reported income with tax office figures, and was later ruled to be unlawful.

The department dropped a $40,000 debt against Melbourne woman Madeleine Masterton in 2019 after she challenged it in court, having received legal advice from an Australian government solicitor in March that she had a "very good" chance of winning her case.

The scheme wasn't wound back until November 2019, eight months after the legal advice was received.

Emails shown to the commission saw the department opt to recalculate the debt based on her actual income, rather than have the test case proceed in court.

After he suggested a "lack of desire" for the Federal Court to rule on the scheme's legality, counsel assisting the commission Angus Scott asked former DHS general manager Craig Storen why the department didn't want a ruling.

"The department's position at the time was the use of income averaging was still a valid approach to determining customers' income over a period of time," Mr Storen said.

That prompted commissioner Catherine Holmes to ask: "If you were so confident about that, why not proceed on that basis in the Federal Court?"

But after robodebt continued despite the legal advice that income averaging was unlawful, Mr Storen said he believed the advice was only specifically relevant to the case involving Ms Masterton, not the entire scheme.

An incredulous Mr Scott said that was clearly not the case.

"That advice implicitly stated the use of ... income averaging was not a lawful basis to calculate a debt," he said.

"It was commenting on the provisions of the social security legislation that didn't just apply in the Masterton case, it applied to social security recipients more generally."

Ms Holmes agreed, asking: "You thought there was no statutory basis regarding Ms Masterton, but for everyone else it was fine?"

Mr Storen eventually accepted it was clearly implied the wider scheme was not lawful.

"The advice was in the context of the Masterton case, and my understanding at the time was the Commonwealth needed to consider its position more broadly," he said.

"I don't understand why that position was taken. My role ... was delivering a function in accordance with the government's policy."

Earlier, Mr Storen confirmed the department's standard response to negative media coverage about the scheme was to point to a 2017 ombudsman report that didn't find it to be unlawful.

The royal commission heard on Monday the department had been able to "effectively co-write" that report.

It is investigating how the scheme, which operated between 2015 and 2020, went ahead despite departments knowing the debt calculation method was unlawful.

The commission continues, with Jonathan Huston from the Department of Human Services set to give evidence on Tuesday.

Australian Associated Press