Compensation payouts to robodebt victims to be tax free

Victims of the robodebt scheme won't have to pay tax on any compensation payments they receive.

Laws set to be introduced to federal parliament will pave the way for robodebt compensation to be exempt from income testing and tax for recipients.

About 125,000 people who were affected by the scheme will share $475 million in compensation, following a class action settlement.

The robodebt scheme was an unlawful scheme from 2015 to 2019 that falsely accused welfare recipients of owing the government money, based off automated data from the tax office.

Some of Australia's most vulnerable people entered into extreme debt, went without food or even died by suicide as a result.

Government Services Minister Katy Gallagher said the laws would ensure people affected by robodebt would receive compensation payments in full.

"This will give certainty to robodebt victims that the amount of compensation they're entitled to won't change," she said.

"Robodebt never should have happened, and it's only fair these compensation payments be exempt from government recovery arrangements."

The compensation payments are set to be paid out to victims before the end of 2026.

Class action representatives will be paid between $20,000 and $25,000 each for "inconvenience occurred over a number of years".

As part of the laws, the compensation payments will not be treated as additional income for settlement recipients.

It means it won't affect other support payments received that could be linked to the total income recipients make.

The class action was launched by Sydney woman Katherine Prygodicz, who had twice been chased for a debt of more than $14,000.

Assistant Treasurer Daniel Mulino said the measures would ensure people affected by robodebt would not have other arrangements affected.