By Sonya Parsons, Partner and Craig Gibson, Partner

Recent months have seen non-government schools in many states face scrutiny from both regulators and the public around spending decisions.

This has included The King School’s recent decision to pay for its headmaster, deputy principal and their spouses to fly business class to England to attend the Henley Regatta, for approving plans to build a plunge pool at the headmaster’s residence, and for the reported annual salary of the headmaster.

Questions are legitimately being asked – is any of the approved expenditure necessary for the operation of the school, and should the government continue to fund a school whose governing body believes so (seemingly in contrast to the views of the broader public and many parents of students at the school)?  While some of these questions may go to government policy, regulators are turning their attention to levers available in education legislation across Australia to police spending – in NSW, this is the making of ‘for-profit’ declarations for non-government schools.

For a school in NSW to receive government funding, it must not be operating for-profit.  School proprietors should be conscious of the technical nature of this concept, and the practical steps that must be implemented to avoid a for-profit declaration.

What is a ‘for-profit’ recommendation?

To receive government funding, schools in Australia must operate on a not-for-profit basis.  In NSW specifically, under section 83C of the Education Act 1990, the Minister may be satisfied that a school is operating for-profit, if:

1. the proprietor’s assets or income are used for any purpose other than for the operation of the school, or
2. any payment is made by the school for property, goods or services:
   1. at more than reasonable market value,
   2. that are not required for the operation of the school, or
   3. that is in any other way unreasonable in the circumstances having regard to the fact that financial assistance is provided to or for the benefit of the school by the Minister, or
3. any payment is made by the school to a as a member of the governing body of the school (unless a reimbursement for necessary operational expenditure).

The consequences of being declared a for-profit entity can be disastrous to a school, particularly as it includes a cessation of funding and also potentially a requirement to repay past funding.  It can also include both a loss of charitable status and subsequent taxation implications at a Federal level.

The decade long saga involving the Malek Fahd Islamic School has provided the clearest judicial guidance to date on the NSW not-for-profit requirement for school funding.

The history of the Malek Fahd litigation

Malek Fahd is an Islamic school in Western Sydney which was established in 1989.

In 2010, in what was reportedly the first use of the NSW Government’s powers under the predecessor provision to section 83C of the Education Act 1990, the NSW Government froze funding to Malek Fahd. In 2012, the NSW Government wrote to Malek Fahd following a Federal Government audit, contending that Malek Fahd had been operating on a for-profit basis since 2010 and demanding repayment of the $9 million provided to it by the NSW Government since that time.^[1]

In 2014, amendments to the Education Act 1990 included that, upon commencement, a for-profit declaration would be taken to have been made under section 83D of that Act that the Malek Fahd Islamic School at 405 Waterloo Road, Greenacre operated for profit from 1 January 2010 until 31 July 2012.^[2]

The basis of the government’s complaints seemed to be focussed on fees paid to Australia’s peak Muslim body – the Australian Federation of Islamic Councils (AFIC) – which founded the school and owned the land on which the three schools that made up Malek Fahd were situated. A series of transactions had been entered into between the school and AFIC, but the main complaint by Malek Fahd was the failure of the AFIC to repay a number of loans in the millions of dollars. Court proceedings between the two entities in 2017 aired the history of the relationship and the sizeable financial transactions they had entered into.[3]

In 2017, a further finding that Malek Fahd had operated for-profit was made[4], and was upheld on appeal in the NSW Civil and Administrative Tribunal (NCAT).^[5]

In September 2022, Malek Fahd’s application to the Supreme Court to overturn the Minister of Education’s decision (based on the for-profit recommendation from 2017 confirmed in NCAT[6]) that Malek Fahd would have to repay $11 million in funding that it received in 2014 and 2015 was rejected.[7] That $11 million in funding will therefore be recovered by a reduction in government funding over the next five years.

Justice Rothman also clarified in this latest decision that, in terms of the operation of section 83 of the Education Act 1990:

• a decision to require the repayment of funding was a discretionary matter for the Minister. However, once exercised, it required the Minister to recover the whole of a payment of financial assistance to the school, and not a lesser amount of that payment.  That means that, in the case of Malek Fahd, where financial assistance was provided in a single annual amount for each of 2014 and 2015, the entire amount for each year had to be recovered and could not be limited to the proven amount of the for-profit activity;
• the Minister was not obliged to provide reasons for any decision on the exercise of their discretion; and
• the Minister is only permitted not to terminate financial assistance, where a finding of for-profit activity has been made, if the noncompliance is minor, and more appropriate action can be taken.[8] Otherwise, the Minister must not provide financial assistance.  That means that the Minister’s discretion not to recover funding operates in the same way, such that the discretion should only be exercised where the non-compliance is minor and more appropriate action can be taken.[9]

How to avoid for profit declarations

In order to avoid the possibility of a for-profit declaration, schools should consider:

• the Not-for-Profit Guidelines for Non-Government Schools prepared by the Department of Education and approved by the Minister;
• obtaining multiple quotes for the provision of goods or services;
• obtaining an independent benchmarking analysis or report for the purchase or property, goods or services, especially where those items are being provided by a related entity;
• obtaining confirmation from the school’s solicitor or other adviser that the terms of any arrangement (not just the core commercials) otherwise reflect general arm’s length provisions typical of an arrangement of that nature;
• seeking to procure contractual arrangements that have limited committed length but allowing for extension at the election of the school. Alternatively, or in conjunction, schools should look to imbed independent benchmarking processes into their agreements, that see rents and other payments adjusted to market value at relevant intervals; and
• looking to ensure that there are mechanisms in any agreement with a related entity (or in any lengthy contract with a third party) that allow the school the ability to unilaterally terminate the arrangement if it puts at risks the school’s registration or funding at any point in future.

How can we help?

Our team at Mills Oakley has extensive experience Australia-wide assisting schools who are facing regulatory audits as to potential for-profit activity, and also assisting with drafting contracts (including with related parties) to avoid the not-for-profit requirement being breached.

[1] https://www.abc.net.au/news/2012-07-31/islamic-school-ordred-to-repay-249m-funding/4166084

[2] Section 33 of Part 14 of Schedule 3 to the Education Act 1990

[3] Malek Fahd Islamic School Ltd v The Australian Federation of Islamic Councils Inc [2017] NSWSC 1712

[4] The actual declaration was a ‘Non-Compliance Declaration’, which is founded on a finding that the school was operating on a for-profit basis

[5] Malek Fahd Islamic School Limited v Non-Government Schools Not-For-Profit Advisory Committee, NSW Department of Education [2019] NSWCATAD 183

[6] See footnote 4 above

[7] Malek Fahd Islamic School Ltd v Minister for Education and Early Childhood Learning [2022] NSWSC 1176

[8] Ibid., at [194]

[9] Ibid., at [195]