05:10

The federal government has settled a landmark challenge against its robodebt program – conceding a $2,500 debt raised against Deanna Amato was not lawful because it relied on income averaging.

In orders made by consent on Wednesday, the federal court declared the debt was “not validly made”, an order to garnishee Amato’s tax return was also invalid and there was no basis to add a penalty to the debt.

Rowan McRae, the executive director of civil justice access at Victorian Legal Aid, said the case has “helped to clarify the unlawfulness of the robodebt system for hundreds of thousands of Australians in the same situation, who received or paid off a robodebt based only on averaging”.

Last week the federal government abandoned sole reliance on income averaging to calculate debts, dismantling a central plank of the robodebt program’s automation, which has seen tens of thousands of welfare recipients overcharged for alleged debts.

In a statement explaining the consent orders, the court noted the initial debt of $2,900 was calculated based on Australian Taxation Office income data averaged across fortnightly periods as if this were Amato’s actual income in each period.

The court said the conclusion Amato had received social security benefits she was not entitled to was “not open on the material before the decision-maker” because there “no probative material” that the average reflected Amato’s actual income.

“In the circumstances, there was no material before the decision-maker capable of supporting the conclusion that a debt had arisen … The conclusion that a debt had arisen was therefore irrational, in the requisite legal sense.”

The court ordered the commonwealth to pay Amato’s costs and $92 of interest.