The robodebt saga could become even more expensive for the federal government after a judge suggested it’s likely it will have to pay back interest on debts collected.

Nearly 400,000 Australians will receive refunds totalling $720 million over welfare debts thrown up by the scheme because of faulty income assessments by the Australian Taxation Office.

Despite the Morrison government backtracking on the debts in May, a class action against the Commonwealth is still set to go ahead in September from a group arguing interest should be repaid.

The group, represented by Bernie Quinn QC, argues there is still a substantial case, as well for an admission the robodebt scheme was unlawful, and that the Commonwealth was “unjustly enriched” with interest earned on what it collected.

He said there was also uncertainty around when refunds might be issued, which could be formalised with a court ruling.

The Commonwealth is resisting including interest earned on the money it collected in the refunds it pays back. But Justice Bernard Murphy said in a Federal Court case management hearing on Tuesday that “it’ll be obligated to pay interest”.

“You’re being sued for the debt plus interest. You’re acknowledging the debt’s raised illegally … how do you avoid interest?” he asked the government’s lawyer, Michael Hodge QC.

Mr Hodge said setting aside the debts en masse and repaying the money wasn’t the same as admitting there had been unjust enrichment.

He also resisted potential arguments by the class action that debts unrelated to robodebt, but identified as a result of the scheme, could be tainted and also invalid.

Mr Quinn has been granted more time to amend the group’s claim.

He has indicated an intention to argue claims of misfeasance in public office alongside arguments for damages.

A bid to hear those claims in a separate trial was rejected.

Justice Murphy also ordered the federal government to update its defence to match public announcements.

In its formal defence to the court, the Commonwealth has admitted only that debts wholly identified through robodebt are invalid.

In public statements it has said debts both wholly and partly identified through the disgraced scheme are invalid.

The case looks set to go to trial over three weeks, starting in September.

-AAP