The Federal Government has suffered a significant setback in its automated debt recovery system, known as robodebt, with the Federal Court finding that the debt of a plaintiff was unlawful.

Victoria Legal Aid brought forward the challenge on behalf of a 33-year-old woman who had a debt of more than $2900 raised against her by the Department of Human Services, which runs Centrelink.

Justice Jennifer Davies found that the court "could not have been satisfied that a debt was owed in the amount of the alleged debt".

The judgement said "the demand for payment of an alleged debt... was not validly made", and that garnishing the plaintiff's tax return was "not a lawful issued notice".

She ruled that the Commonwealth must reimburse her interest of $92.06, and pay her legal fees. The Department had waived its debt of $1709.87 against plaintiff Deanna Amato prior to the court ruling.

"It feels amazing. You can feel so small and helpless next to the Government, but I am so glad that the unfair and ultimately unlawful aspects of this system have been brought to light," Ms Amato said in a statement.

I feel pleased to have gotten this outcome but it's bittersweet to know so many people have paid money under this system.

"I had my money refunded to me, but I hope that others who have paid dodgy debts will also have a way to get their money back."

"I think it's important that people remember that they have legal rights to question decisions that get made about them."

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Whatsapp Deanna Amato challenged the debt she received from 2011-12 when she was receiving Austudy.

Deanna's debt was determined using the practice of debt-averaging - where authorities calculate an average fortnightly income based on a person's annual tax return figure. This can cause errors for people who work casual or part-time hours, or are only on welfare payments for part of the year.

Last week, Minister for Human Services Stuart Robert announced that the Department would no longer raise debts based solely on debt-averaging. People who have received a robodebt notice based on debt-averaging will have their debts reviewed.

He also said future debt notices would be halted while the review was underway.

A massive class action lawsuit championed by Labor and with 4,000 plaintiffs has been filed separately against the legality of the robodebt system.

Is this the end of robodebt?

A spokesman for Minister Robert told Hack in a written statement that the Government will continue with a tweaked version of the existing robodebt system.

"As announced last week, the Government has already taken action to strengthen the Income Compliance program," the statement said, referring to the Minister's announcement on debt-averaging.

"The decision does not affect the Government's use of data matching between income reported to the Department of Human Services and that reported to the Australian Tax Office to seek clarification of income whilst receiving a welfare payment."

We will continue to use income averaging as part of a range of options to ask a welfare recipient to engage with DHS if there is a discrepancy.

On Wednesday afternoon the Senate passed a motion by the Greens calling on the Government to release documents relating to the legal advice it received before scrapping debt-averaging.

The statement rejected that call, saying the Government will "not be discussing the legal position" because of the upcoming class action lawsuit.

Robodebt 'an extraordinary scandal'

Since losing the federal election in May, Labor has called on the Government to scrap the robodebt system. During the election, it had argued the system needs to be reviewed.

Shadow Attorney-General, Mark Dreyfus, welcomed the Federal Court ruling.

"This judgement simply confirms that we have got a Commonwealth government that has been extorting money from Australian citizens with no basis for doing so," he told ABC TV.

It's an extraordinary scandal, robodebt... I think that the Prime Minister owes the Australian people an apology for this extraordinary program.

Mr Dreyfus said the Government should now review every single debt that has been raised through this system.

One million letters have been sent out to 700,000 people since the existing robodebt system started in 2016, according to the Department.

The Department further admitted during Senate estimates that 20 per cent of letters sent out result in no debt whatsoever.

Hack has approached Minister Roberts for comment.