The federal government has lost a Federal Court challenge to the controversial "robodebt" system, with the court finding the income averaging process used to calculate a debt issued to Deanna Amato was unlawful.
It comes a week after Government Services Minister Stuart Robert announced no further debts would be raised by using income averaging only.
The case brought by Victoria Legal Aid had been due for a hearing next week, but on Monday the government sent a letter to the court conceding elements of the case were unlawful and orders were then issued by consent.
As well as conceding the original debt calculated using averaging was unlawful, the government also agreed that adding a 10 per cent penalty to the debt and garnishing Ms Amato's tax return were also unlawful.
The order issued by Justice Davies on Wednesday said the Court "could not have been satisfied that a debt was owed in the amount of the alleged debt".
Justice Davies' orders laid out how Centrelink took Ms Amato's income for the 2012 financial year and averaged it across the 26 fortnights.
"There was no probative material before the decision-maker, in the ATO Information or otherwise, to support the assumption [that the annual income was earned equally across the fortnights]," Justices Davies said.
But the government did have evidence - the previously reported income - to show income hadn't been earned as apportioned over those fortnights.
"The conclusion that a debt had arisen was therefore irrational, in the requisite legal sense."
"Deanna's 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," said Rowan McRae, executive director civil justice access and equity at Victoria Legal Aid said.
Ms Amato said she was pleased with the result.
Centrelink raised a $2754 debt against Ms Amato, but the first she heard of it was when her $1709.87 tax refund was taken in full by the agency last year.
The agency had sent eight letters to an old address and she hadn't responded, so her income was averaged across a three month period in 2011-12 and a 10 per cent penalty applied because she hadn't paid.
After the case was filed, Centrelink contacted Ms Amato's former employers, verified her earnings and decided the debt was wrong and she was actually overpaid only $1.48.
The government was ordered to pay Ms Amato $92.06 interest and her legal costs.
Commonly referred to as "robodebt," Centrelink introduced a system in 2016 where a person's declared income to the tax office was matched to the income they declared to Centrelink. If there was a discrepancy, they were asked to provide payslips to prove their earnings, and if they didn't respond, their income was averaged across the year and a debt was calculated.
In some cases the first time a person found out they had a debt was when they heard from debt collectors, or had their tax return taken away.
On Wednesday the Senate passed a motion ordering the government to produce legal advice that led to last week's decision to stop using averaging for new debts, and to review debts that had been raised using averaging.
Attorney-General Christian Porter said last week the decision had been made on the basis of legal advice.
Shadow attorney-general Mark Dreyfus said the government owed people an apology.
"I would call on the government to re-examine every case where they have used automated information, including the ones where people have been too terrified to protest or challenge," he said.
"I would be calling on the government to examine every single case which they have used this algorithm-driven process for."
The public sector union has called for the government to provide clarity so staff can help the hundreds of thousands of people who could be affected.
"There will be hundreds of thousands of Australians rightly confused this afternoon, and the Morrison Government must provide clarity to the community and staff about exactly what this order means to all other debts, and what the government is going to do about it," said Community and Public Sector Union president Melissa Donnelly.