Social Services Minister Tanya Plibersek announced on Sunday that Services Australia will be given extended powers to cancel debts which have resulted from coercive control or financial misconduct.
The agency will also be able to take into account circumstances such as mental capacity, the impact of natural disasters, and homelessness.
Under the current rules, a social security debt can be waived where there are "special circumstances".
But the special provisions do not apply when a person "knowingly" makes a false statement or fails to comply with an obligation under social security law, even if that information was provided as the result of coercive control or violence.
Services Australia will now factor this in.
Australian Council of Social Service chief executive Cassandra Goldie said victim-survivors shouldn't be punished twice by being forced to repay debts that were never truly theirs.
"This reform will go a long way to limiting the harm caused," she said.
"It is completely unacceptable that people living on the lowest incomes who are exposed to coercive control and abuse have been forced to carry debts that entrenched their hardship."
Economic Justice Australia has been advocating for the change for years and "wholeheartedly" welcomed the reform.
"Debts are crippling at the best of times, but this has made an incredibly difficult situation, fleeing family violence, even more devastating," chief executive Kate Allingham said.
Ms Allingham said people have had their "measly" social security payments further reduced to repay these debts, which resulted in food being taken off the table.
In Australia, one in four women and one in 14 men have experienced physical and or sexual violence from an intimate partner since the age of 15.
Ms Plibersek said financial abuse was an "insidious" form of violence and one of the reasons why women feel it is impossible to leave an abusive relationship.
"Every victim survivor who relies on our social security system should feel like they can trust that the system will keep them safe. It should be part of the solution, not part of the problem," she said.
Government Services Minister Katy Gallagher said the changes will ensure the social security system works with victim-survivors, not against them.
"We've listened to the stories of women who've been trapped in dangerous relationships and then left with debts they didn't even know existed," she said.
"That's unacceptable, and this reform will give Services Australia the power to take those circumstances into account and do the right thing."
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