Four years since the agency started raising debts against current and former welfare recipients by using averaged tax office data, and in the face of an expensive class action, the government has capitulated, but will only admit the system is being "refined".

Government Services Minister Stuart Robert announced on Friday afternoon that debts that were raised either fully or partly using averaging of Australian Tax Office data will be refunded starting in July. He said those who had paid debts didn't need to take action and would be contacted by the department.

Refunds will also be made for any interest charges or recovery fees that people incurred through the debts.

The debt-raising program, officially called online compliance intervention, but widely referred to as "robodebt," began in 2016 and was paused last year after the government received legal advice that the debts raised were unlawful.

Gordon Legal launched a class action of behalf of those who had received the debt notices, with more than 12,000 people registering their interest in the case. That case was due to enter mediation in June.

The government has faced multiple legal warnings about the scheme before pausing it in November last year, including decisions in the Administrative Appeals Tribunal and a case in the Federal Court brought by Victoria Legal Aid. In that decision the judge found it was unlawful to raise debts based on tax office data when there already existed previously reported income data.

"The conclusion that a debt had arisen was therefore irrational, in the requisite legal sense," the decision said.

James Naughton, who had been leading Gordon Legal's case said the case would still be pursued, and the government's announcement hadn't addressed the claim for damages or the disress caused.

"In our view any process undertaken will need to be approved by the court to ensure that the rights of those affected, including their right to claim damages and interest are safeguarded," Mr Naughton said.

"Many of the more than 100,000 people who have now contacted us, have understandably lost faith in Services Australia and the government, and deserve to know how their entitlement to receive their money back is being calculated and administered."

Campaigners and advocates celebrated the announcement on Friday, but the moment was described as "bittersweet" due to the pain it has caused and lives that have been lost.

Victoria Legal Aid welcomed the decision on Friday.

"We hope that the process will proceed smoothly for people who are owed money," said Rowan McRae, Executive Director of Civil Justice Access and Equity.

"Problems with accuracy and communication beset the robodebt scheme and it is time for a stronger, fairer social security system that puts people first."

On Friday Mr Robert maintained the decision was part of a refinement of the program.

He admitted his advice was that "raising that based on average income is not sufficient under the law so we will return that money and move forward with our income compliance program with further proof points to ensure it remains sufficient".

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Greens senator Rachel Siewert, who has been a longtime campaigner against the program, said it was an historic day.

"I am overwhelmed thinking of the untold suffering that this illegal scheme has caused," she said.

"It will be almost impossible to account for the social and economic costs of the Government's illegal robodebt scheme."

Senator Siewert promised to scrutinise the process to ensure every person who has been subject to robodebt is repaid.

Labor's Bill Shorten said the government had been dragged "kicking and screaming" to the announcement, and should apologise to those who had debts raised against them.

"They will still have to account to the families who lost adult children to suicide because of Robodebt, and for the various other harms, stresses and inconveniences caused," Mr Shorten said.

The Community and Public Sector Union said people working in Centrelink had warned the system wouldn't work even before it was rolled out.

"It's disgraceful that it took the fear of a class action to force this government to act," national secretary Melissa Donnelly said.

Administrative Law lecturer at La Trobe University Darren O'Donovan said the announcement was "a long overdue recognition of a truth, that hundreds of thousands of unlawful debts were issued to some of the most vulnerable in our society".

"It is time for serious questions to be asked about why this action was delayed for so long. Today is a vindication of all the ordinary Australian who spoke truth to power for four long years," he said.

"The government must now apologise and explain how it will restore people's trust in a department so central to work, families and care in this country."