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More than 100,000 people have been affected by a second robo-debt-like scheme, which has run for two decades and could cost $1 billion to correct. By Rick Morton.

Exclusive: DPP reviews prosecutions for false welfare debts

A Centrelink sign.
Centrelink signage in Brisbane, Friday, June 30, 2023.
Credit: (AAP Image/Darren England)

Centrelink used the same bad mathematics as the illegal robo-debt scheme to raise debts estimated in the hundreds of millions of dollars from more than 100,000 welfare recipients – some of whom have faced prosecution.

The revelation shatters any illusion that defective administration was contained to a single program. If all inaccurate debts are ever found, the cost to fix the mess could top $1 billion.

The issue was apparently first raised by then independent senator Rex Patrick in late 2020, and bureaucrats have since been working quietly to understand what went wrong, and the possible consequences.

In that time both the Department of Social Services and the agency now known as Services Australia have sought external legal advice on multiple occasions, attempting to verify whether a default debt calculation method relied on by Centrelink since 2003 had any legal authority.

Services Australia chose not to tell the Commonwealth ombudsman in early 2021, when the ombudsman raised individual cases of inaccurate debts with the department. The integrity agency was only briefed on the issue in February this year, at which time it launched an own motion investigation into the matter.

At the start of this month, the Commonwealth ombudsman published a report titled “Lessons in Lawfulness” about this debt calculation technique, known as “income apportionment”, which Centrelink used for almost two decades until December 7, 2020, to effectively fit the reported income of welfare recipients into the rigid eligibility fortnights defined under the legislation.

“The agencies are still determining how much the known and potential debts are affected – that is, how much payment rates went up or down because of unlawful or inaccurate income apportionment calculations,” the report says.

“It is unknown how many other customers may have been impacted by unlawful or inaccurate debts or underpayments.”

The Commonwealth Director of Public Prosecutions told The Saturday Paper that Services Australia had “identified prosecutions before the courts affected by income apportionment which may affect the amount of financial advantage alleged”.

“At this stage, the CDPP is considering the circumstances of each prosecution with a view to allowing the income apportionment issue to be addressed,” a spokesperson said in a statement. “The CDPP has taken or is taking steps in relation to these matters to ensure these defendants/courts are advised. As a result a number of matters have been adjourned.”

What will happen to the historic cases dating back to 2003 is unclear.

Prosecutions are just the pointy end of the compliance system, however. The vast majority of Centrelink clients affected were simply slapped with a debt.

Scholars such as the University of Sydney’s health and welfare law lecturer, Dr Chris Rudge, as well as insiders who have spoken with The Saturday Paper, suggest the number of people affected could be higher than 500,000.

The bureaucrats “never worked out how to make a mathematical… a lawful mathematical approach”, Rudge says.

Centrelink could have changed the legislation to allow its accounting practice, he says, but this did not happen. “If the law had said you can just do it across different periods, then this wouldn’t have happened.”

At issue is an obscure provision of the Social Security Act, section 1073B, which purports to give officials the power to take the self-reported earnings of a benefit recipient and squeeze it into a Centrelink fortnight by dividing the lump sum income by 14 days. The practice is called “income apportioning”. It was considered necessary because the reporting periods did not neatly match the Centrelink assessment fortnights, and often overlapped. However, the section of the social security law immediately following is clear that this method can only be used within a single fortnight.

The use of income apportioning to assess eligibility for welfare payments is discrete from robo-debt, which was a specific program of debt-hunting using annual tax office data, and created illegally in 2015 when it received cabinet approval. Under this administrative practice, bureaucrats used payment amounts accumulated over, for example, several months’ work, and attempted to fit them into fortnightly blocks. However, it is the same mathematical concept – averaging – that was deployed under the robo-debt scheme. Neither had a legislative basis. The earnings apportionment tool used by Centrelink employees actually did this averaging automatically. Robo-debt used the same tool, but with annual data, and with a deliberate strategy to raise debt.

Centrelink public servants were using the dodgy mathematics to uniformly populate successive assessment fortnights which, had a person been receiving benefit payments, could have retrospectively rendered them ineligible for those payments, creating a debt.

“It’s so artificial,” Rudge says. “If it goes beyond one entitlement period, it’s unlawful.”

As a former debt team worker tells this newspaper, cultural problems at the agencies meant these assumptions were never tested.

“In training they actively told us to never ever go to the legislation,” the source says. “Because they thought – and frankly they would be right – that the level of staff member that did that sort of work would not be able to accurately interpret it.

“Their view was go to the operational blueprint because we’ve got this wonderful team of people that are always reviewing the legislation and AAT [Administrative Appeals Tribunal] decisions and making sure it’s adjusted so it’s always right.

“In hindsight, that wasn’t correct.”

The robo-debt royal commission uncovered a political and administrative conspiracy spanning six years in which the debt-raising scheme was conceived, delivered and continued despite legal advice from the beginning that stated it was against the law.

Despite robo-debt’s effective end, in late 2019, and the use of income apportionment to determine payment rates being aborted in December the following year, it is clear sections of the vast social security bureaucracy either did not know what they were permitted to do, did not seek to find out or, worse, knew and continued anyway.

In the course of normal business, Centrelink has raised almost $12 billion in debts from mid-2018 to March this year, and waived $180 million of that due to “administrative error”. Income apportionment, which goes beyond simple error, dates back “at least” to 2003, according to the ombudsman.

In light of this, The Saturday Paper asked both responsible ministers and their departments in the Albanese government how they could be sure officials were even now following the law in raising debts.

“I have been assured by my agency that it is confident it has a system in place that is accurate in calculating debts and is in accordance with its policy guidelines,” Government Services Minister Bill Shorten said in a statement. “The culture has been changing at Services Australia since the change of leadership after the Robodebt Royal Commission and the change of government in 2022.”

When Senator Patrick first raised individual cases related to the use of income apportionment, he spoke with two key figures found to have been intimately involved in robo-debt: Kathryn Campbell and former DHS chief counsel and chief operating officer Annette Musolino.

Campbell, then secretary of Social Services, said there had been “challenges” in administering the social security system because of a timing issue: whether income was assessed at the time it was earned or at the time it was received. She flagged the December legislation change as a way to end this impasse.

The cases Patrick’s staffers had been chaperoning through internal review, the AAT, senate estimates and finally put in writing to the then Social Services minister Anne Ruston in the Coalition government were all significant. There were 15 cases with an average debt of $3853.

Campbell’s explanation – that there were challenges in administering the scheme – failed to take account of the fact it was a policy choice made by bureaucrats to use the date income was earned as the trigger for benefit assessment, rather than when it was paid or received. They believed other approaches would create an inequity: some people could defer payments, rendering them eligible for social security benefits in fortnights where they would otherwise have been ineligible.

In doing so, senior bureaucrats read the law wrongly, for two decades.

When the legislation was changed in December 2020, the bills digest gave a hint of the scale of “overpayments” that would otherwise go on to become debts.

“The changes … are expected to provide savings of $2.1 billion over five years from 2018-19. The savings will be derived from reduced overpayments arising from inaccurate income reporting.”

Social Services Minister Amanda Rishworth said she was first briefed on the departmental problem in February this year, almost nine months after the Albanese government was elected. Shorten wasn’t advised until April.

“Agencies have been working to resolve the legal matters on historic income apportionment since the issue was brought to their attention in October 2020,” Rishworth says. “I have asked the secretary of my department – Department of Social Services – for an update on the legal issues by the end of the month.”

Although the Commonwealth ombudsman notes there is “an unresolved and significant difference of opinion between some of the legal advices”, its investigation statement leaves no room for interpretation.

“Our investigation found Services Australia and its predecessor the Department of Human Services had been spreading employment income evenly over two or more Centrelink instalment periods (Centrelink fortnights), in circumstances where this was not permitted by social security law,” the ombudsman says.

“This approach, known as ‘income apportionment’, could result in customers’ employment income being assessed in the wrong Centrelink fortnight, which could in turn result in their fortnightly Centrelink payment being over- or under-paid.”

A former Centrelink employee says the ombudsman’s certainty on unlawfulness and the competing legal interpretations of the departmental advice suggests the disagreement is not over the legality of using income apportionment but how to remedy a roughly two-decade overreach.

In other words, how can the government go back in time and use the evidence it has to perform a correct calculation within the law? There is little agreement on how this could be done. Further complicating matters is that every debt or case has to be remedied manually.

“So you know, you can look at the numbers that are in the calculator system but until you actually match those up with the pay slips, you can’t be sure what’s going on,” the source says. “The best-case scenario is if there is a pay slip on file but very few pay slips actually break down into the days you worked – you just get a total hours, which can’t be apportioned.”

In a statement to The Saturday Paper, a Department of Social Services and Services Australia spokesperson said, “The differences between different legal advices referred to in the report are not a difference between the two agencies, but instead reflect the complex nature of the legal questions on this issue.

“Once the legal issues are resolved, the Secretary of DSS will finalise a remediation strategy for historic cases and the General Instructions will be refreshed, as required, to reflect this strategy. We acknowledge this has taken longer than we would have wanted but we are determined to get it right.”

These general instructions were created by DSS to guide Services Australia in “how to process and review potential debts … which were potentially miscalculated due to unlawful application of income apportionment provisions”.

The ombudsman says they contain a glaring omission.

“General Instructions represent the policy position for how to calculate income apportionment debt-raising processes,” it says. “Currently, they do not cover any potential underpayments which may have been caused by income apportionment practices.”

These same instructions suggest the DSS secretary will only review historical decisions where a person requests a review and it is “not expected that the Secretary will initiate administrative reviews of historical debt decisions”.

The ombudsman disagrees.

“We consider the position adopted by DSS and Services Australia in the General Instructions is not appropriate,” the report says. “This is inconsistent with the principle of discretionary power and may lead to unfair outcomes for customers.”

Dr Rudge said it was clear there was a “probative issue in terms of factual reality” with the use of apportioned income to essentially guesstimate when a person was eligible for welfare, but in this case the Commonwealth had “a clear statutory problem”.

“They were saying to people, ‘We don’t know when you earned your income, we don’t have any evidence of when you earned it, but based on our policy interpretation of the law that says we can calculate it when you earn it, receive it or are paid it, we’re going to do this income apportionment when we think you earned it.’ But they went outside the entitlement period.

“And if you look at how many people were subject to just debts [all debts] year to year, it’s two million every year. So if you just say two million debts were raised over 17 years and it is policy to apportion income, I don’t think it’s too crazy to say the number of people affected by this is much, much bigger than 100,000.”

Bill Shorten says there is a “genuine focus” now on making sure payments are accurate. “I do not assume, where there is a discrepancy, that the citizen is wrong and the government is right,” he said.

And now there may be a precedent for compensation. The robo-debt royal commissioner, Catherine Holmes, noted in her final report that, where legal avenues were constrained, people affected by “defective administrative decisions” could be eligible for payments from a Commonwealth scheme for those who had suffered “detriment” from such decisions.

This article was first published in the print edition of The Saturday Paper on August 12, 2023 as "Exclusive: DPP reviews prosecutions for false welfare debts".

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