About 470,000 debts were raised through the defunct welfare scheme, which is now the subject of a class action challenge.
“Services Australia will now put in place the mechanisms needed to start making refunds, including how affected customers are advised of next steps,” Government Services Minister Stuart Robert said on Friday.
“Consultation will occur with stakeholders, including the commonwealth ombudsman, and clear communication is a priority, so people understand what it means for them.”
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 wound back the scheme prior to the court decision.
The scheme matched Australian Tax 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.
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.
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