Hundreds of thousands of youth allowance recipients will be able to claim their education costs as tax deductions as a result of a landmark High Court judgement delivered today in Canberra.

The Commissioner of Taxation had appealed to the High Court to overturn a Federal Court ruling, which allowed former Australian Catholic University student Symone Anstis to claim deductions for her study costs because they were incurred in gaining her youth-allowance income.

But the High Court today dismissed the appeal and ordered the Commissioner to pay Ms Anstis’ costs.

The ruling opens the way for hundreds of thousands of youth allowance recipients – and possibly other income-support recipients – to claim tax deductions for expenses they incur in qualifying for their payments.

In its advice to the incoming federal government in September, Treasury warned that if the High Court dismissed the Commissioner of Taxation appeal, there would be “significant budget implications”. The cost for the budget is not known but is likely to represent several million dollars.

Ms Anstis, a former Australian Catholic University student, was successful last year in her bid to claim $920 as self-education expenses after fighting the Taxation Office through a number of jurisdictions over three years.

While studying full-time to be a primary teacher, Ms Anstis worked as a part-time sales assistant for retail chain Katies, where she earned $14,946. She also received a youth allowance of $3622 during the 2006 income year.

She claimed education expenses including travel costs, supplies for children during teaching rounds, student administration fees and depreciation of her computer.

The Tax Office rejected the claim, so Ms Anstis and her father, Michael, who is a qualified solicitor but does not work as a lawyer, fought it all the way to the Federal Court, which handed down its ruling in Melbourne last November.

The full court of the Federal Court upheld an earlier decision that because the former student had to be enrolled in a full-time course of study to get her assessable income of youth allowance, any costs incurred in the course of studying should be deductible.

About 440,000 students receive youth allowance or Austudy. Many of these students would earn enough with the addition of part-time work to have a tax liability, according to Asssociate Professor Dale Boccabella from the University of NSW.

He said last year items including computer depreciation, stationery or textbooks could now be claimed as a deduction. In the past, the Taxation Office had made it clear it would not allow educational expenses to be claimed against welfare payments.

“The decision further complicates tax administration in the area of self-education expenses, an area that is already riddled with difficulties,” he said.

The Commonwealth Ombudsman has slammed the taxation office for failing to properly handle complaints about misused tax file numbers. A report released on Tuesday detailed eight cases where the numbers were compromised or linked to the wrong person.

In one case, a welfare recipient was hit with a $7000 Centrelink bill and a $2250 tax penalty after another taxpayer made an error with an online tax return. In another case, the Australian Taxation Office (ATO) wrongly assumed a pensioner from a non-English speaking background had two tax file numbers, which meant income was incorrectly attributed to her. Both cases took two years to resolve. Ombudsman Allan Asher said the ATO’s response to tax file complaints was unreasonable.

“Our investigations have shown a systemic failure by the ATO to properly recognise and respond to the issues faced by taxpayers,” he said in a statement.

The ATO’s second commissioner, David Butler, admitted it could have handled the cases better.

“We have carefully reviewed the draft report and agree that the experiences for some taxpayers with compromised tax file numbers have been less than satisfactory,” he said in a letter to the ombudsman dated June 29.

But he insisted the errors were not typical. The tax office has since adopted five recommendations by the ombudsman. Among them, it set up a client identity support centre in late 2009 to investigate identity fraud. It has also taken steps to monitor cases of compromised tax file numbers, and has hired case managers to contact affected taxpayers. An ATO spokeswoman said the tax office would continue to work with the Commonwealth Ombudsman on future concerns.

There have been an embarrassing series of revelations about the conduct of the Tax office in relation to a number of issues recently. The handling of the tax matter related to Paul Hogan was a situation where the tax office was forced into an embarrasing reversal of its decision to prevent Mr Hogan from leaving Australia whilst an investigation into his affairs continued.