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Latest updates in the not-for-profit requirements for NSW Non-Government Schools

Schools that receive government funding must operate as ‘not-for-profit’ and comply with section 83C of the Education Act 1990 (NSW). This requires school assets and income to be used only for the operation of the school (and the education of its students). All payments, including to related parties, must be at reasonable market value and required for the operation of the school.

Two recent decisions (from the Court of Appeal and from the NSW Supreme Court) relating to two different schools provide further guidance to independent schools in NSW about the operation and construction of section 83C of the Act.

1. Christian Community Ministries Ltd v Minister for Education and Early Learning [2023]

This case clarified that the Minister for Education and Early Learning can not only make a ‘non-compliance declaration’ under s83E(3) of the Education Act (thereby imposing conditions on a school with which it must comply to continue receiving financial assistance), but also seek recovery of amounts paid to a school while it operated ‘for profit’. In other words, the Minister does not have to make a ‘for profit’ declaration to recover government financial assistance paid to a non-compliant school.

The Minister made a decision on 8 December 2021 requiring Christian Community Ministries Ltd to repay the NSW Government $3,856,286.36, being funding paid to The Lakes Christian College from 1 January 2017 to 4 May 2021 while it was operating for profit. This came some time after the College was declared ‘non-compliant’ on 10 May 2021 and a number of conditions were imposed on the College. 

There are several takeaways from this case which we expect will be of great interest to non-government schools. In particular, schools should be aware that:

1. While there is a discretion not to recover the full amount of funding paid out to a school during the periods while it is non-compliant or operating for profit, the Minister is permitted to recover the full amount. The amount to be recovered does not need to be ‘proportionate’ to the value of any ‘for profit’ activities.
2. Management fees that are paid to related parties must be for services required by the school, must be defined and properly documented and comply with section 83C (so that they are for no more than reasonable market value). The Not-for-profit Guidelines for Non-Government Schools (currently being reviewed) and the Shared Service Agreements Newsletter provide further guidance on how to structure and document these arrangements.
3. Where related parties arrange loans for a school, the terms should be set out in a written contract (and, in all cases, interest must not be for more than market rates). Payments that are made to related parties will generally be the subject of greater scrutiny than ‘arm’s length’ transactions.
4. While many faith-based schools have previously provided funds to a diocese or other related entity for real property to be held on trust for the school, such an arrangement will now be considered to be ‘for profit’. Further, a school cannot transfer real property to a trust for no value without breaching section 83C of the Act.

2. Malek Fahd Islamic School Limited v Minister for Education and Early Learning [2023]

This Appeal is the latest decision in a string of litigation relating to Malek Fahd Islamic School and its challenges to the decision of the Minister for Education (made in 2021) to recover government funding of more than $11 million (by reducing future financial assistance), which was paid to Malek Fahd while it was operating for profit in 2014-2015 in accordance with section 83C.

The Court of Appeal has dismissed Malek Fahd’s appeal against the Supreme Court of NSW’s judgment in Malek Fahd Islamic School Limited v Minister for Education and Early Childhood Learning [2022] where the Supreme Court held that none of the grounds of judicial review had been made out and the Minister was entitled to recover the funding.

In considering whether the Limitation Act 1969 (NSW) applied to the Education Act such that the right to recover funding had expired, the Supreme Court initially found that while there was a limitation period, this only ran from when the Minister’s Advisory Committee recommended that a non-compliance declaration should be made (and therefore the action against Malek Fahd had been taken within the required time frame).

The main issues in the Appeal were whether:

1. the Limitation Act 1969 operated to limit the recovery of payments of financial assistance to ineligible non-government schools; and

1. if it did, the date at which the “cause of action” arose.

Ultimately, the Court of Appeal determined that the right to recover government funding to a school that has operated ‘for profit’ (even for some time in the past) by way of reducing future financial assistance otherwise payable to the school is not subject to the operation of s14(1)(d) of the Limitation Act 1969. Therefore, there is no limitation period and the Minister is able to take action to recover funding by reducing future financial assistance even after 6 years from the date that the Minister becomes satisfied that a school has operated for profit.

Therefore, it is also not relevant that any for profit conduct or activities of a school occurred more than 6 years in the past.

However, where any for profit conduct occurred prior to the commencement of section 83C (following the amendments made to the Act in 2014), this conduct will be considered by reference to the requirements in the previous section 21A, as in force immediately before it was repealed.

Both cases highlight the significant financial and reputational risks of breaching section 83C and the increased regulatory action by the Not-For-Profit Advisory Committee in relation to any for-profit activities. Further, a breach to the not-for-profit requirements in a state education act (such as 83C) will also jeopardise the provision of federal funding under the Australian Education Act 2013 (Cth).

We regularly advise independent schools in relation to the operation of section 83C and assist with structuring transactions to comply with the not-for-profit requirements. Please contact David Ford or Stephanie McLuckie if you require any assistance in this area in relation to your school.