The watchdog who investigated the robodebt program says he should have referred the responsible department to the appeals tribunal in 2017 because of his doubts about the scheme's lawfulness.
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Richard Glenn served as acting Commonwealth ombudsman between January and April 2017 when an investigation into the human services department took place.
The department misled his office by withholding key documents that flagged issues with the scheme's legality.
Yet ombudsman staff still held doubts about the advice the department had provided them.
Questions about the legality of the scheme raised in a draft report were removed in the final version, which was used by the former coalition government to defend continuing with the scheme.
Mr Glenn said although his team had "doubts", he couldn't form a definitive view about the program.
He decided to focus on improvements with the administration of the scheme, but said he should have clearly stated the report did not answer the question of legality.
"On the material before me, I was not satisfied that we could make a declaratory statement, and I chose not to comment on legality," Mr Glenn said.
"I think I should have said very clearly 'I am not dealing with the legality' ... to exclude the possibility of people over-reading the report."
The ombudsman did not refer the department to the Administrative Appeals Tribunal at the time, but Mr Glenn said knowing what he does about the scheme now he would have made a different decision.
"My thinking was influenced by the fact that I couldn't make a clear determination one way or the other about legality," he said.
"The advice that I was receiving from the team was that they were concerned, but we couldn't land a crisp, contrary view."
Mr Glenn said department staff were "highly invested" in defending the program, but he did not recall a similar investment from former coalition ministers.
"Certainly the department advocated strongly its belief in the system," he said.
The unlawful scheme ran from 2015 to 2019 and used annual tax office data to calculate and raise debts.
The commission is examining the role of the ombudsman, whose initial investigation identified flaws in the scheme, but did not declare the income-averaging process unlawful.
On Wednesday, the commission presented former senior assistant ombudsman Louise Macleod with several documents, including emails from 2014 flagging legal problems with income averaging, which she had not seen before.
Ms Macleod said that had this legal advice been provided to her office at the time, the ombudsman would have publicly called for the scheme to be scrapped.
Current ombudsman Iain Anderson said the revelation that the department withheld crucial documents from the office during the investigation was "extremely disappointing".
He said evidence heard by the commission showed that the department did not respect the role of the ombudsman as an integrity agency, or their own responsibilities as public servants.
Mr Anderson said he was committed to improving the ombudsman's processes and training when it comes to handling departments they suspect are not being honest.
Australian Associated Press
