People on the cashless debit card (CDC) are still able to gamble and buy alcohol, drugs, cigarettes and pornography because a potential loophole in the system allows them to use credit cards without detection while they are on income management.

Government officials have admitted it is unable to track the use of credit cards, and people who have credit cards can still use them to buy restricted items and use their CDC income to pay off the debts.

The admission came at a Senate hearing into plans to extend the CDC to the whole Northern Territory from April next year, in response to questions from Labor senator Malarndirri McCarthy about how CDC participants can use the BPay system to buy illicit materials without detection.

Independent senator Jackie Lambie added: “That’s a good question, how does that work?”

Department spokesperson Liz Hefren-Webb said: “Where there’s a pattern of unusual transactions we do investigate. We’re just not aware that particular instance has arisen.”

Lambie replied: “So, I go and get eight bottles of wine on my Visa card, and you guys have got no idea, and then just pay it off with my other card. OK, that’s a new one, that’s a beauty.”

“Everyone will be getting visa cards tomorrow,” she added, to laughter in the room.

Social services spokesperson Selina Patrick said the department was “not doing any active monitoring of the use of credit cards” but “we would ask for evidence if large amounts of money were going to a credit card”.

The CDC or Indue card is designed to replace the Basics card in the NT, a form of equally controversial income quarantining that has been in place for 12 years.

Aboriginal people living in “prescribed communities” are not allowed to use their Basics card at places that sell alcohol, cigarettes and pornography. At the time the intervention began, the Howard government said it was necessary to restrict these items to protect children in communities who were allegedly vulnerable to sexual exploitation.

The rationale for this change, Hefren-Webb said, “has been a policy decision of government informed by discussions that have been had with community representatives”.

A cashless welfare card. Photograph: Melissa Davey/The Guardian

“The intervention came in based on a restriction on porn,” McCarthy said. “Do you see there is a conflict with that policy?

Hefren-Webb said: “Since 2007, porn has changed a lot in the sense that there is lot more accessibility to pornography without spending money than there was 12 years ago, so perhaps purchases of pornography is less of a relevant factor.

“We don’t have any specific evidence that the ban was ineffective but it’s just community views around access to porn and the relevance of using a restricted card to prevent access to porn has changed, and the government has taken on board those community views.”

In its written submission to the committee, the department said “the CDC offers participants a superior product that provides greater consumer choice”.

“The objective of the CDC is to learn more about whether limiting the amount of welfare payments able to be spent on alcohol, drugs or gambling will lead to a reduction in community-level harm.”

Earlier, the committee heard a scathing assessment of the system by academics who have studied in the current trial sites.

Dr Michelle Peterie, social science research fellow at the University of Queensland, said people were experiencing anxiety, depression and panic attacks at being unable to manage their income.

“Ordinary Australians who had no history of substance abuse, who were just shopping for groceries to feed their children” were experiencing shame and humiliation in using the card, Peterie said.

The social stigma was causing people to withdraw from participation in their communities. This is a problem, Peterie said, because “informal social networks are a key way for the unemployed to find work”.

“Our overwhelming finding is that the CDC is having a disabling impact on peoples’ lives,” Peterie said. “We are all here in this room because we believe in evidence-based policy. The evidence from our study is that the CDC is not only failing to achieve some of its core objectives but is making things a lot harder for some people.”

ANU associate professor Dr Janet Hunt from CAEPR, the Centre for Aboriginal Economic Policy Research, told the committee “the Basics card has been in place for 12 years. Income management has made no discernible difference in the NT.

“A lot of public money has been wasted which instead could have been spend on programs that actually work,” Hunt said. “I oppose this bill because I think it is a waste of public money.”

The committee will conclude its investigation into the draft bill on Friday and is due to report in early November.