The federal government was warned its so-called robo-debt welfare recovery system was illegal, internal emails show.
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The emails between senior bureaucrats released to a senate inquiry reveal discussions from late November on the day the system was scaled back.
The robo-debt system matched tax office and Centrelink data to claw back overpaid welfare payments.
People were then contacted by the automatic system and were told they had to prove they didn't owe the supposed debt.
The emails show Australian Tax Office general counsel Jonathan Todd providing advice to tax commissioner Chris Jordan ahead of meetings with the Department of Social Services, which runs Centrelink.
"In further discussion with DSS, it appears that what you need to raise is: They have advised you that they have received legal advice that debts based solely upon DSS own income averaging of ATO annual tax data are not lawful debts ('robo-debts')," the email says.
"They have also suspended the raising and recovery of robo-debts as of today."
The debts were not due to the Commonwealth and therefore not legal, the emails say.
Later in November the Federal Court found the robo-debt scheme to be unlawful, and a separate class action lawsuit has been launched against it.
Greens senator Rachel Siewert said the government must reveal how long it knew the scheme was illegal.
The coalition moved to the fully-automated system in 2016 after the previous Labor government introduced a similar process in 2011, but had each case reviewed by a staff member at the department.
Labor says the government will have to pay every dollar back.
"This is a mass act of unjust enrichment by the government. It is theft of people's money," the opposition's government services spokesman Bill Shorten said.
Last year alone the ATO chased more than 80,000 payments, amounting to more than $80 million.
Government Services Minister Stuart Robert says the robo-debt scheme was refined to make it more "robust". The minister has not publicly commented on legal issues clouding the scheme.
The government is changing how welfare recipients report their income to Centrelink, in a bid to save $2.1 billion over four years.
Under the changes, welfare recipients would report income when it's paid rather than earned.
The underpinning legislation was introduced to federal parliament on Thursday, and the new reporting system could begin from July.
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.
The draft legislation also triggers the start of single touch payroll, which means a person's income data from the ATO will be automatically uploaded to the government system so bureaucrats can check figures.
Australian Associated Press
