The government is wiping the debt attached to hundreds of thousands of people on Centrelink. Services Australia used income apportionment to calculate debts in circumstances where recipients didn't have detailed information about the days and hours they worked.

The method was used from the early 1990s to 2020, before it was replaced with a newer system. Social services minister Tanya Plibersek said the changes announced on Wednesday will create a more "fair and transparent" debt recovery process.

“This $300 million package will mean Services Australia does not waste time or resources chasing accidental debts that are uneconomical to recover, and spare Australians with small debts significant stress," she said.

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"It will also provide compensation for those affected by the historical practice of income apportionment, in recognition of clear evidence it was invalid."

A Federal Court case result last month ruled the process of income apportionment was "not lawful", and the Commonwealth Ombudsman recommended a “large-scale waiver of debts” back in 2023.

The government will increase the minimum threshold for waiving small or accidental debts to $250, which is the first adjustment in 30 years.

In July, the median affected debt was $330 and the average age of that debt was 19 years.

By increasing that threshold, roughly 1.2 million debts will be waived or will no longer be pursued.

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Why is this happening?

Labor acknowledged that the administrative cost of recouping these smaller debts was typically higher than the value of the debt itself, which made the whole process uneconomic.

"This decision will mean Services Australia can spend more time on significant matters and upholding the integrity of our social security system," Plibersek's office said.

"It’s important to remember that in many cases, income apportionment only changed the amount of debt owed by an individual by a small amount, and up to a third of those affected actually ended up with a lower debt.

"Income apportionment was never used by the Albanese Labor Government, but we are dealing with its legacy in the most responsible and cost-effective way that we can."

Payments up to $600 available for those affected

People with debts who were affected by income apportionment from 2003 to 2020 will be able to apply for a resolution payment of up to $600.