More than $720 million raised through the Morrison government's controversial robo-debt program will be refunded.
Government Services Minister Stuart Robert says the scheme was not "sufficient under law".
"So, therefore, we will return that money and move forward with our income compliance program with further proof points," he said on the Gold Coast.
"We have advice now that shows that when the program started five years ago, the information for the use of averaged ATO income was not sufficient and further proof points were needed."
About 470,000 debts were raised through the defunct welfare scheme, which is now the subject of a class action challenge.
The debts are linked to about 373,000 Australians as some people were made to repay Centrelink multiple times.
Mr Robert said the repayments would be made automatically.
Interest payments and recovery fees will also be refunded.
The controversial system was ruled unlawful last year, with the Federal Court saying Centrelink could not have been satisfied the debt was correct.
The government had wound back the scheme prior to the court decision.
The scheme matched Australian Taxation Office and Centrelink data to claw back overpaid welfare payments.
People were automatically contacted if Centrelink thought they might owe more than $1000.
One in five debt letters sent were based on false information.
Labor's government services spokesman Bill Shorten said the minister should apologise.
"He should immediately front the Australian public and apologise to the multitude of robo-debt victims who have suffered so much because of this scandal," he said.
Greens senator Rachel Siewert was cheering that people will be repaid, saying it was impossible to count the social and economic cost of the scheme.
"This is a historic day. I am overwhelmed thinking of the untold suffering that this illegal scheme has caused," she said.
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