The flaws of the Income Compliance Program lie not only in the considerable impacts on the people caught up in its processes, but in the fundamental design of the program itself.
The data-matching and debt-raising at the heart of the Income Compliance Program is based on income averaging, a methodology that has been widely criticised throughout the five years of the program's operation.
Social security advocates, legal experts and other key stakeholders have asserted that income information from the ATO, averaged and plotted to Centrelink income fortnights, should not be used as evidence of overpayment debts. Many described the use of income averaging as the 'fundamental flaw' of the Income Compliance Program.
Income averaging has been used in two distinct ways in the program:
To identify a discrepancy. The data-matching process used by Services Australia compared averaged income information from the Australian Taxation Office (ATO) with fortnightly earnings reported to Centrelink to identify possible overpayments. Where a significant discrepancy was identified, an income compliance review commenced.
As 'evidence' of a debt. Where an individual did not respond to an initiation letter or did not provide updated income information, the averaged income from the data-matching process was used as 'evidence' of an overpayment and used to raise a compliance debt.
Evidence from Services Australia has asserted that income averaging has been an established trigger for identifying and raising potential social security overpayment debts since at least the 1990s. It is now clear that using income averaging to subsequently support raising an overpayment debt has never amounted to sufficient evidence of a debt under social security law.
This chapter outlines the issues inherent in using income averaging, including its legality as 'evidence' of a debt, and concerns about how the Income Compliance Program appears to reverse the onus of proof in establishing debts.
It then considers the current status of the Income Compliance Program and the committee's next steps for this inquiry.
Averaged income isn't real income
Since the start of the Income Compliance Program, evidence has shown that income averaging – whether being used to establish a discrepancy or as evidence of a debt – is highly unlikely to reflect an income support recipient's real fortnightly earnings in the period under review.
While income tax is calculated on an annual basis, income support payments are calculated fortnightly. People receiving income support are generally required to report their earnings each fortnight directly to Centrelink in order to receive the appropriate level of support payment adjusted to their income.
Under the Income Compliance Program, Services Australia averages ATO income information across the period of earning, as recorded in a Pay As You Go (PAYG) income statement or other tax records. This averaged income is then compared to the fortnightly income reported by the individual to Centrelink during the same period to identify whether there may have been an overpayment of income support.
When income is averaged across a period of earning, the calculation apportions out the same amount of income to each fortnight. For example, if an individual earned a total $4800 over a period of six fortnights this would be apportioned as earning $800 each fortnight.
Ms Kate Beaumont from the Welfare Rights and Advocacy Service, a specialist community legal centre in Western Australia, explained that this apportionment approach was:
… unlikely to give an accurate result unless someone worked and earned exactly the same amount for the whole year and didn't have any gaps in their Centrelink payment, because it doesn't necessarily account for those things that occur.
Many of the individuals impacted by the Income Compliance Program are likely to experience 'lumpy' incomes or employment – that is, having an inconsistent rate and frequency of income from one or more employers, or moving in and out of employment while receiving income support payments.
The Tasmanian Council of Social Service described the experience of people accessing income support payments, particularly in Tasmania which has a high rate of casual and seasonal work:
Our understanding, through talking to people with lived experience, is that often they'll have a period of casual employment, when they will come off the Newstart payment, but that over the course of the 12-month tax or financial year it might happen four or five times.
These concerns were shared by other social service experts, including the Australian Council of Social Service (ACOSS), which explained that it is 'very rare' for someone working casually or part time to earn exactly the same amount of income every fortnight for an entire year, and the National Social Security Rights Network, which told the committee that:
We know that the majority of people relying on income support do not receive the same pay cheque week after week.
Submitters commented that the high likelihood of income support recipients having this kind of inconsistent employment income shows that equally apportioned averaged income should not be used when trying to determine their income earning patterns.
Tax statements don't reflect earning periods or patterns
One of the other key difficulties in using averaged income is that, when comparing ATO income information to Centrelink income information, the actual period in which income was earned may not be accurately reflected in a PAYG statement or other annual tax data.
Employment income for tax purposes has not historically been reported in weekly or fortnightly granularity, such as in as payslips. Instead, PAYG statements from employers reflect all of the income received by that individual in that financial year.
Submitters noted that the dates on a PAYG statement are ‘effectively completely meaningless’ as it is very common for an employer to use full financial year dates for all employees on a payroll, rather than including the specific period of work.
Using the earning period in ATO income information when averaging income can result in income being averaged over periods where the individual was not working and/or fortnights where the individual was not receiving income support. This means that an equal apportionment of income across the earning period cannot be automatically assumed.
NotMyDebt and other submitters told the committee that ADEX Debt Schedule Reports obtained from Centrelink, which set out how an individual’s income has been apportioned and compared to income support payments, show that income averaging under the Income Compliance Program does not take these gaps into account in its calculations.
This is not a new problem
Evidence received throughout this and the previous Senate inquiry shows that the Income Compliance Program has not taken the issues of inconsistent income and earning periods into appropriate consideration in its design and implementation, nor has the program been sufficiently updated since 2015 to address these issues.
The 2017 investigation into the program by the Commonwealth Ombudsman (Ombudsman) pointed out the risks in using income averaging in the Income Compliance Program, stating its ‘failure to take into account gaps in employment' was impacting the accuracy of the program's debt calculations.
The Ombudsman recommended improvements to communication with individuals to explain that, if they did not update their income information, debts raised based on averaged income would be 'less accurate'.
While there have been some small updates in the Employment Income Confirmation (EIC) and Check and Update Past Income (CUPI) systems to warn individuals to check the details and dates of their employment, the Ombudsman's 2019 implementation report found that:
… the initiation letter messaging (including linked webpage messaging) still does not adequately convey the consequence of using averaged ATO information, rather than providing payslip or bank statement information [emphasis in original].
It does not appear that Services Australia made any further updates to address the Ombudsman's concerns before it ceased raising debts based on averaged income in November 2019.
Income averaging is not a legal proof of debt
Since the commencement of the Income Compliance Program, there has been significant concern that averaged income information is not sufficient evidence to establish the existence of a debt under the Social Security Act 1991 (Social Security Act), particularly because it is unlikely to reflect the real period or pattern in which income was earned.
The legislative framework for the recovery of social security overpayment debts due to the Commonwealth is outlined in Sections 1222A and 1223 of the Social Security Act. Mr Peter Hanks QC described that debts typically may arise under these provisions:
… where a person receives a form of payment, such as parenting payment or Newstart allowance, for which the person is not qualified; or … where a person receives a form of payment, for which the person is qualified, at a rate higher than the correct rate — because the person’s other income was higher than recorded by Centrelink.
Legal experts have maintained since the start of the Income Compliance Program that averaged income is not a sufficient legal basis for founding a debt. Emeritus Professor Terry Carney AO, an expert in social security law and a former member of the Administrative Appeals Tribunal, wrote in 2018 that the section 1222A(a) of the Social Security Act:
… states that there can only be a debt if another provision creates it. There is no relevant provision ‘automatically’ creating a debt just because data-matching shows a discrepancy, so Centrelink is obliged to establish that there is a difference between the amount paid and the amount to which a person was entitled …
Witnesses and submitters told the committee that basing debts on this kind of incorrect or incomplete income information called into question the legality of debts raised under the Income Compliance Program. ACOSS submitted that using income averaging to establish compliance debts in this way:
… seemingly goes against the Department’s debt recovery guidelines that state: “evidence is required to support the claim that a legally recoverable debt exists.” In our view, the Government has insufficient evidence to claim that overpayments exist from carrying out a crude data-matching process.
These concerns were upheld in the findings of the test case Deanna Amato v The Commonwealth of Australia in November 2019.
Amato v Commonwealth
Ms Deanna Amato discovered that she had a debt through the Income Compliance Program when her tax return was garnished a year after the debt had been raised without her knowledge. Victoria Legal Aid filed an application for review of Ms Amato's debt in the Federal Court in June 2019.
The debt related to six fortnights of income support that Ms Amato had received while studying in the 2011–12 financial year. Because Ms Amato had been employed full time before she commenced her studies, when her annual ATO income data was averaged the income for those six fortnights was overestimated at nearly four times as much as she had actually earned.
On 27 November 2019, the Federal Court of Australia declared by consent of the parties that a demand for payment of Ms Amato's alleged debt was not validly made because the Commonwealth could not satisfy that the debt was owed within the scope of the relevant provisions of the Social Security Act.
In effect, Amato v Commonwealth settled the legal question that debts raised based on averaged income alone are not valid debts under the Social Security Act. The findings were summarised by Victorian Legal Aid as follows:
The Federal Court declared that the demand for payment of the alleged debt was not validly made because the information before the decision-maker was not capable of satisfying them that a debt was owed; a critical requirement under the Social Security Act.
… the conclusion that Deanna owed a debt was not open on the material before the decision-maker because:
the assumption underlying the use of the averaged ATO income data was that Deanna’s annual income was earned in equal fortnightly amounts
there was no probative material before the decision-maker to support that assumption
there was probative material, being Deanna’s declared income, which indicated that she had not earned her income in equal fortnightly amounts.
Despite significant criticisms since the start of the Income Compliance Program, it has taken nearly five years for the Commonwealth Government to admit that income averaging, used as it has been under the program, is not sufficient legal evidence of the existence of a debt.
In that time, nearly half a million debts were raised against and pursued from some of the most vulnerable members of Australia's population without a proper legal foundation.
Repayment of unlawful debts
The implications of the Federal Court's findings in November 2019 and the subsequent changes to the program are only now becoming realised and it is likely to be at least November 2020 before all $721 million of the unlawfully raised income compliance debts collected by the Commonwealth are repaid.
However, the Commonwealth has not committed to pay any compensation to those who have been impacted by unlawful debts, nor any interest on the monies which it unlawfully received. This is a matter being considered by the Robodebt Class Action, discussed later in this chapter.
It is also not yet clear whether the Commonwealth will repay any debts that were unlawfully raised in compliance activities which predated the Income Compliance Program.
The committee intends to continue monitoring the repayment process and the ongoing legal challenges to the program.
Tax garnishing of unlawful debts
The committee is also concerned that cases such as Ms Amato's show difficulties in the process of garnishing social security and other debts from income tax returns.
It is clear that the ATO does not have the ability to check whether debts flagged for garnishee by other Commonwealth agencies have been properly and legally raised before it implements garnishee orders on tax returns.
The committee will continue to explore this matter.
Reversing the onus of proving a debt
Witnesses and submitters have expressed the view that requiring individuals to update income information through the program has placed the onus on the individual to disprove the existence of a speculative debt rather than on Services Australia to prove it, creating a 'reverse onus of proof'. When debts were still being raised based on income averaging, this reverse onus of proof meant that if an individual could not update or verify their income, the review would generally result in a debt.
Several legal experts have questioned whether requiring individuals to disprove an Income Compliance Program debt by verifying past income is in fact in accordance with the debt-raising provisions of the Social Security Act and other social security law.
For example, Mr Gregory Barns, a barrister and spokesperson for the Australian Lawyers Alliance, explained that:
We see nothing in the legislation that allows Centrelink to [reverse the onus of proof]—in other words, to say to a person, 'You need to show us that the debt's not due and payable' … In the normal course of things, if a department believes that a debt is due then it has to accurately state that debt, and then it's up to the department to prove, essentially on the balance of probabilities, that that debt is owing and then recover it from the person.
Services Australia has maintained throughout this inquiry that the Income Compliance Program does not reverse the onus of proof by asking individuals to provide confirmation or updates to their past income information. In its submission, the agency outlined that:
In line with Section 66A of the Social Security (Administration) Act 1999, the responsibility to explain any differences between the income identified from data matching and the information held by the Department is, and has always been, an obligation on the customer in the first instance. This has not changed.
However, as people are being required to report income information which they had already provided to Centrelink up to seven years earlier, without necessarily making any updates to that information, it is unclear whether this provision is actually relevant to the Income Compliance Program's operation.
Professor Carney suggested that Services Australia is working under a misunderstanding of section 66A of the Social Security (Administration) Act 1999, which is not a relevant provision for raising Income Compliance Program debts because it is not related to debt recovery, but rather is designed to 'prompt speedy advice' of changes in circumstances. He told the committee:
The predicate of the section is that there is a change of circumstances. If the original reporting of income is accurate and timely there is no ‘change’ to trigger the operation of the section. The supposed obligation to revalidate past reporting lacks any predicate if there has been no change in reality (as distinct from some Centrelink supposition derived from a mathematically unsound average) … The section … is not phrased to generate any ongoing legal duty to assume the onus of disproving allegations of debt …
This interpretation was shared by the Law Council of Australia, which submitted that obligations under the section should not 'be conflated with the requirement to prove or disprove the existence of a claimed debt'.
Robodebt Class Action
The key legal challenge relating to the onus of proof under the Income Compliance Program is a class action proceeding on behalf of people who received income compliance debts.
Lodged in the Federal Court by Gordon Legal on 19 November 2019, the Robodebt Class Action argues that the income compliance scheme, on the whole, was unlawful.
The class action claims that there was no statutory or other onus on individuals to establish that they did not owe a debt to the Commonwealth, and that the Commonwealth did not have power under the Social Security Act to use its income averaging calculations to:
determine or assert an overpayment debt;
procure or compel the provision of income information from individuals; or
generate or send 'Robodebt' notifications, i.e. initiation letters, to those individuals.
The Robodebt Class Action argues that recipients of all debts raised through the program should be compensated by the Commonwealth for not only the money they paid or had taken from them as repayments, but interest on that money and any other consequential losses.
The Commonwealth has admitted that it did not have the power to raise debts based on averaging, in line with its broader response to Deanna Amato v The Commonwealth of Australia. However, it has defended its requests for income information in initiation letters, maintaining that it did not compel people to provide those documents and did not require any statutory authority to request information or to use income averaging of ATO data to select participants for the program.
As part of the proceedings, the class action is also seeking to understand when the Commonwealth became aware of the insufficiencies of the program. Relevant documents that identify or refer to the Commonwealth's knowledge of the 'limitations, accuracy or reliability of the Robodebt System' during the program's inception and operation have been sought by the applicants, however the committee understands that the Commonwealth has successfully claimed immunity over documents related to Cabinet.
At the time of this interim report, hearing dates for the class action have been set aside for September and October this year. Gordon Legal has expressed hope that the class action will be resolved by the end of the year.
Although debts are no longer being raised using income averaging as a method of 'proving' a debt, income averaging is still at the heart of the Income Compliance Program's design.
Rather than requiring Services Australia to prove the existence of an overpayment of income support, the Income Compliance Program has reversed the onus of proof and made it the responsibility of the individual to show that they did not earn their income in the pattern that was identified through income averaging.
As discussed in Chapter 2, verifying income information is often an arduous and distressing process for participants and, in many cases, their income information is unchanged from that originally provided at the time of earning.
The committee has serious concerns that there is no legal foundation for Services Australia to require people to resupply their employment income information after the fact if that income information has not changed.
The committee is pleased to see that the issue of onus of proof is being considered in the Robodebt Class Action, as it is of the view that this practice requires further investigation, particularly if Services Australia intends to continue to the Income Compliance Program in the future.
Current status of the program
As of 19 November 2019, Services Australia ceased raising debts based on income averaging and began the process of identifying the debts which had been raised in this way and would need to be refunded.
Despite the finding that debts cannot be raised based on income averaging, Services Australia did not cease raising debts where individuals identified by income averaging subsequently provided additional information, such as pay slips or bank statements, which would be used to support a debt finding. This only occurred in April, when all Centrelink debt-raising and recovery operations were paused due to the COVID-19 pandemic.
Meanwhile, no new initiation letters have been sent out under the program since mid-November 2019, when initiations were paused ahead of the Christmas period in accordance with regular practice.
Services Australia has indicated that Centrelink compliance activities will recommence after the pandemic period, with a greater emphasis on prevention of overpayments through improved income reporting, but has not confirmed specifically whether the Income Compliance Program will continue.
It is not clear whether the Commonwealth Government intends to resume the Income Compliance Program, or to finalise those outstanding reviews which had been initiated before November 2019, once Centrelink's broader compliance program restarts after the pandemic pause.
To date, the Income Compliance Program has allowed Services Australia to enact an unlawful policy of raising debts based on income averaging on a large scale, resulting in nearly half a million debts being issued without a proper legal foundation. All individuals who received notices under the program, whether issued debts or not, have also been impacted by the dubiously legal policy of reverse onus of proof.
Now is the time to review the legality of compliance
If the Commonwealth Government intends to restart the Income Compliance Program, or to apply any of the principles of the program across its other compliance activities, the design and operation will need to be significantly altered to ensure that no debts are raised without a legal basis.
Despite the various tweaks and changes to the program's communications and online platforms over the past five years, none of these have addressed the serious legal flaws in the program's foundation.
While the impacts of these policy failings are clear in relation to the Income Compliance Program, the committee also has concerns about the legality of Services Australia's approach to debt-raising in all of its compliance programs, current and historical.
The committee notes that, with all raising and recovery of Centrelink debts currently paused due to the COVID-19 pandemic, now presents the perfect opportunity for Services Australia to review its obligations in relation to overpayment debts under social security law.
The committee recommends that Services Australia immediately reviews its evidentiary responsibilities for raising overpayment debts in all of its compliance programs, with particular reference to:
the responsibilities of the agency under sections 1222A and 1223 of the Social Security Act 1991 for proving an overpayment debt is due to the Commonwealth; and
whether section 66A of the Social Security (Administration) Act 1999 provides an appropriate legal basis for requiring individuals to update income information where there has been no change in circumstances.
A broad-based review is required
The committee also has serious concerns that the fact that the Income Compliance Program continued to operate unlawfully for such a long period and with such a negative ongoing impact on individuals shows broader critical failings in policy, design and implementation from Services Australia.
The committee is of the view that there is a strong case for a broad-based independent review to be conducted into Centrelink's compliance practices and, in particular, the Income Compliance Program.
This review should include a forensic audit of all debts raised to date based on or identified using income averaging, and should have powers to compel witnesses and evidence.
Depending on the outcomes of the Robodebt Class Action, a further judicial review may also be required to resolve questions about who was responsible and knew what and when about the program's policy and legal basis.
Given the scale of the program's failings, it may well be that a Royal Commission is the appropriate avenue for such a review.
The committee recommends that an independent review is immediately initiated into the policy, design, administration and impact of Centrelink's compliance program, including the Income Compliance Program.
The committee's next steps
With such a wide range of matters relating to the Income Compliance Program's legality, implementation and impact still uncertain at the time of the current report, the committee intends to pursue further evidence about these matters in the next phase of its inquiry.
Evidence withheld by Government
Attempts by Senators to seek clarification on a number of issues relating to the legality of the Income Compliance Program have been obstructed by claims – both in this inquiry and in the Senate Estimates process – that releasing this information would be against the public interest and would compromise the Commonwealth's position in current legal proceedings.
The committee reported its rejection of one such claim to the Senate in February 2019, resolving that:
… the minister's claim for public interest immunity does not sufficiently justify withholding the information requested by the committee.
The committee considers that the requested information is vital evidence for the inquiry into Centrelink's compliance program, as it goes to the legal foundation of the program and its administration.
The recommendation of that report, which was adopted by the Senate, required the Minister representing the Minister for Government Services to provide answers to a series of questions placed on notice relating to the legal advice about the Income Compliance Program, including but not limited to questions about:
meetings and/or briefings between the minister and Services Australia in relation to the current legal proceedings regarding Centrelink's compliance program;
the frequency and dates of legal advice obtained by Services Australia;
legal advice about the lawfulness of debt or debt components solely based on extrapolations from ATO records;
legal advice in relation to liability for the death of any Australian who received a debt notice under the compliance program; and
the cost of legal advice in relation to the compliance program.
Despite this resolution of the Senate, answers to questions on notice provided to the committee on the prescribed date continued to rely upon the rejected claim of public interest immunity.
At the public hearing on 31 July 2020, the Secretary of the Department of Social Services tabled a further claim of public interest immunity from the minister, dated 29 July 2020, relating to questions about legal advice and the Income Compliance Program. The committee rejected this claim and informed witnesses at the hearing of its intentions to report this to the Senate.
The committee has also received a claim of public interest immunity from the minister, dated 13 August 2020, in relation to a request for a copy of the Executive Minute to the Minister for Social Services, dated 12 February 2015, which was referenced in the Commonwealth Ombudsman's Centrelink's automated debt raising and recovery system report in April 2017. The committee has not accepted the minister's claim that release of this document, which could disclose Cabinet deliberations, is not in the public interest.
The committee continues to pursue evidence about these matters and will make a separate interim report to the Senate relating to these claims.
Seeking further evidence from individuals and organisations
The committee is also inviting new submissions to the inquiry, including supplementary submissions from organisations and individuals who have already provided evidence in the first stage of the inquiry.
New and supplementary submissions should address the existing terms of reference, however the committee is particularly interested in receiving further evidence about:
the legality and impact of using a 'reverse onus of proof' to acquire income information in the Income Compliance Program;
Services Australia's processes and progress in repaying debts based on income averaging to date;
the impact that changes to the Income Compliance Program have had on individuals, the community sector and Services Australia since November 2019; and
the future of Centrelink compliance activities and programs, particularly compliance activities for the recovery of social security overpayments, in light of those changes.
The committee is also interested in receiving personal accounts and evidence about the experience of individuals who are still being impacted by the Income Compliance Program or other Centrelink compliance activities based on averaged income, particularly those who:
have outstanding income compliance reviews that have not been completed and are currently paused due to the COVID-19 pandemic;
have outstanding reviews or reassessments of their Income Compliance Program debts, or are seeking to have a review or reassessment;
received, or are waiting to receive, a repayment of a debt based on income averaging;
have been subject to debts raised based on income averaging in other Centrelink compliance activities; and/or
believe that they are entitled to a refund of a debt, but have been informed otherwise by Services Australia.
The closing date for further submissions is Thursday, 17 September 2020, however the committee will continue to consider submissions received after that date.
Further information about the committee's inquiry, including any future public hearings, will be made available at www.aph.gov.au/senate_ca.
Senator Rachel Siewert