Officials from the Department of Human Services told a Senate inquiry it contracts three external debt collection agencies to collect the so called "robo-debt": Dun & Bradstreet, Probe Group and Australian Receivables.
Each debt collector is paid a commission based on the amount they recover.
"It's a commission based on the amount collected for each debt... no flat fee, it's just commission," an official from the department told the inquiry.
But the department wouldn't reveal the rate of commission that debt collectors receive under the tiered payment system.
Officials claimed that because there was a competitive tender for the contracts, the payment amount fell under "commercial in confidence" and couldn't be publicly disclosed.
Centrelink's debt collection system differs from the Australian Tax Office's, which contracts people on a flat fee with no commission, officials said.
"In the lead up to this program being unleashed there was a perception created that if you do not comply, you may go to jail," ACOSS chief executive Cassandra Goldie said.
Goldie said the number of people who had been intimidated into repaying debts they did not really owe was unknown thanks to the creation of a "climate of fear".
Greens senator Rachel Siewert questioned why the government was paying debt collectors a commission.
"Do they think it will result in more money being raked back?" she asked BuzzFeed News. "This might go a long way to explain the accounts we’ve heard of overzealous private debt collectors in pursuing potentially incorrect debts."
36,345 people had their debt completely written off between July and December last year after asking the department to investigate. Others have had their debt reduced to as little as $5 per week.
Centrelink said it had been paid $24 million of the $300 million it claimed is owed.
There was no plan to scrap the program, however the Department of Human Services said it was looking to refine the debt-collection process.