The federal government is backing away from the controversial Centrelink "robo-debt" scheme as legal questions remain over the welfare recovery program.
The Department of Human Services has told staff to not rely entirely on the robo-debt system and instead undertake further investigations to determine whether people may owe money.
The system uses tax office and Centrelink data to claw back overpaid welfare payments.
A legal challenge against the scheme, argued by Victoria Legal Aid, will be heard by the Federal Court in Melbourne next month.
Victoria Legal Aid says the method of calculating possible debt, and the fact welfare recipients have to prove they don't owe the money, is unlawful.
Robo-debt is also facing a class action lawsuit, brought on by Melbourne firm Gordon Legal.
Labor frontbencher Bill Shorten says the government's decision on Tuesday is a "complete backflip" and admission of guilt.
The government had felt the "hot breath of litigation", he said.
People who receive a debt notice are presumed guilty and must prove their innocence, and the onus of proof would not change, Government Services Minister Stuart Robert said.
Mr Robert has downplayed the changes, saying income averaging would still be used with other methods of proof.
"Compliance activity will continue for past and future welfare payment recipients where there is a reason to believe they have been overpaid," he said.
Centrelink will reach out to people who received a debt notice in coming weeks.
This group of people is limited to those who did not respond at all to Centrelink, a spokesman for Mr Robert told AAP.
The decision to walk away from robo-debt has been broadly welcomed by welfare groups, the public sector union and the Greens.
The Community and Public Sector Union says Centrelink will need a staffing boost to deal with the change and the backlog of robo-debt cases.
Although the Australian Council of Social Service is relieved about the move, the group says the devil will be in the detail.
It was recently revealed in a Senate committee hearing the estates of up to 200 deceased people were pursued, while victims of the debt notices said they felt bullied by the agency.
About one-fifth of initial debt notice letters sent by Centrelink included information that was later proved to be wrong.
The previous Labor government introduced a similar process in 2011 but had each case reviewed by a staff member at the Department of Human Services, while the coalition moved to a fully-automated system in 2016.
Australian Associated Press