Payments were automatically terminated for 964 people under the federal government's Targeted Compliance Framework between April 2022 and July 2024, despite laws introduced in the aftermath of the Robodebt Royal Commission.
Decision-makers were previously forced to cancel or reduce payments when jobseekers persistently failed to meet obligations such as completing job applications and attending interviews.
The legislation passed in 2022 required a human decision-maker to consider a welfare recipient's circumstances before deciding if their income support payments should be altered.
But the Commonwealth Ombudsman found the Department of Employment and Workplace Relations and Services Australia failed to take adequate steps to ensure the Targeted Compliance Framework worked in accordance with the amendments.
It came as nothing of a shock to the Australian Council of Social Service, whose CEO Cassandra Goldie said had been calling for its scrapping due to such fears since 2018.
"(We said) if it was implemented it would be harsh, it would be brutal, and it would crush people who were subjected to it," she said.
"The ombudsman report finds exactly that is what has happened."
The federal government watchdog said failure to exercise a discretion about cancelling an income support posed "significant, if not catastrophic" consequences for vulnerable jobseekers.
It also found government agencies had failed to take every step required to safeguard jobseekers and were aware of the risks involved in automating income support decision-making.
The Employment and Workplace Relations department was also deemed to have taken "too long to act".
It was made aware of the issue in September 2023, but the department secretary did not pause decisions to cancel income support until ten months later in July 2024.
Even after the decision to halt payment cancellations, a further 45 jobseekers received automatic terminations when they should not have.
The ombudsman made seven recommendations, including processes to ensure lawful decisions and addressing the inappropriate use of automated decision-making.
The Department of Employment and Workplace Relations accepted the ombudsman's recommendation not to resume cancellations until the errors have been rectified and fix decision-making issues.
"We are actively working to improve our governance processes, ensuring legal, policy and operational considerations are integrated into our system," department secretary Natalie James said in a letter to the ombudsman.
Services Australia has also accepted many of the recommendations and has committed to staff training and strengthening procedures to ensure cancellations are lawful.
The Antipoverty Centre has called on the government to immediately stop all Centrelink payment penalties and permanently remove the Targeted Compliance Framework, while welcoming the report as a "step towards justice".
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