Not-for-profit requirements for NSW non-government schools

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Christian Community Ministries Ltd v Minister for Education and Early Learning [2023] NSWSC 272

By Sonya Parsons, Partner and Craig Gibson, Partner.

Summary

In our recent article, we considered the decision in Malek Fahd Islamic School Limited v Minister for Education and Early Childhood Learning[1] which delved into the operation of s83C of the Education Act 1990 (NSW) (Education Act).

Christian Community Ministries Ltd v Minister for Education and Early Learning[2] builds further judicial guidance to assist schools in their understanding of the way that the not-for-profit requirement works in NSW.

The takeaways

A short summary of the takeaways of the case are:

  • the Minister for Education and Early Learning (Minister) can make a ‘non-compliance declaration’ under s83E(3) of the Education Act but still seek recovery of amounts paid to a school while it operated ‘for-profit’;
  • the Minister can either seek to recover the full amount paid to a school while it was non-compliant, or an amount less than that;
  • if a related party arranges a loan for a school, the terms must be properly documented;
  • ‘management fees’ between related entities remain under scrutiny, must be properly documented and must be for the provision of services that comply with s83C;
  • payments to a related party in respect of property assets will be heavily analysed and again, must be carefully documented; and
  • transferring the school’s premises to a related property trust for no value will be a use of assets not for the operation of a school and therefore impermissible.

The facts

On 8 December 2021, the Minister made a decision requiring the plaintiff, Christian Community Ministries Ltd to repay the NSW Government $3,856,286.36. This was the total of the monies received by The Lakes Christian College (School) whilst it was operating for-profit during 2017-2021. The Minister’s decision required that the amount be repaid by way of deductions from financial assistance, which was otherwise payable to the School, commencing in 2022 and extending over a period of five years.

This decision was in accordance with the Minister’s discretion under s83J of the Education Act to recover the amount of any financial assistance provided in respect of a period when the school operated for profit or was a non-compliant school.

Section 83K establishes an Advisory Committee (Committee) which is empowered to carry out investigations for the Minister, and to give advice and make recommendations to the Minister.

In its investigation, the Committee was concerned with the relationship between the plaintiff, which was the proprietor of the School, and the School itself, which operated through a company known as The Lakes Christian College Ltd (TLCC). The Committee found the School operated for profit because:

  • the plaintiff, which was the sole shareholder of TLCC, arranged payments to itself to service loans. These payments were unreasonable given the receipt of Government funding, due to the lack of a written contract establishing the terms of the agreement and the lack of market value testing;
  • the School paid the plaintiff management fees which were unreasonable as the services provided were undefined and there was no record of the type and amount of services which were delivered;
  • payments were made by the School towards a loan held by the proprietor with respect to two adjacent pieces of land purchased by a related third party property trust; and
  • the School site was transferred to the same property trust in 2019. This was said to be a use of the assets not for the operation of the School.

The Committee concluded that the School had operated for profit during the years 2015 through 2021, and it recommended that the Minister declare the School to be non-compliant under s83F. The School sought a review of the recommendation in NCAT and subsequently consent orders were made on 4 May 2021 to limit the Minister’s non-compliance declaration to the calendar years of 2017 through 2021.

On 10 May 2021 the Minister declared the School to be a non-compliant school, and imposed conditions on the financial assistance payable to the School pursuant to her power under s83E. By letter dated 8 December 2021, the Minister notified the School of her intention to recover financial assistance from the period of 2017 to 2021.

The plaintiff argued several grounds on which the Minister’s decision should be set aside. They were:

  • the Minister’s power to recover funding required a declaration under s83F as a pre-condition. That course could not be taken because the Minister could not make a declaration that a school ‘is’ (that is, currently) non-compliant with respect to previous years;
  • the Minister erred in having regard to the findings of the Advisory Committee and failed to accord the Plaintiff procedural fairness with regard to those findings and recommendations;
  • the Minister failed to have regard to the non-compliance declaration (rather than a ‘for-profit’ declaration) in making the recovery decision;
  • the Minister failed to consider that she could recover less than the full amount of the financial assistance provided during the non-compliance period; and
  • the Minister relied on consolidated entities’ accounts, rather than those of the plaintiff.

The plaintiff was unsuccessful on each of those grounds.

Conclusion

Many NSW schools are rightly noting the increased activity by the Department of Education and the Advisory Committee in regulatory action around the not-for-profit requirements.  Compliance with these provisions can be complicated.  This case clarifies that even lower level for-profit activity which warrants a non-compliance declaration, rather than a for-profit declaration, can result in recovery of funding from many years prior.

We are happy to assist with any queries around the operation of s83 of the Education Act and its application to particular schools’ circumstances.

[1] [2022] NSWSC 1176

[2] [2023] NSWSC 272

For further information, please do not hesitate to contact us.

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