The latest development in a dispute between the NSW Government and a Sydney Islamic school (School) regarding funding has seen the School accuse the State Government of racial discrimination after it was ordered to repay $9 million in taxpayer funding following a declaration that it had been operating for profit.

The School in Sydney’s south-west is only one of six Islamic schools across the country to be ordered to submit to an audit by the Federal Government following allegations relating to the misuse of government funding.

The matter is still unresolved and has been the subject of contention between the State and the School for almost three years.

Previous allegations

In 2012 the School received an order from the NSW Minister for Education, Adrian Piccoli to repay $9 million after a federal audit revealed that government funding was being funneled to the Australian Federation of Islamic Councils and not, as the law requires, used for the operation of the School. See our article on the audit.

Following the audit the NSW Department of Education (Department) declared the School to be ‘operating for profit’ between 2010 and 2011. It was ordered to pay back the funding received during that period.

The Education Minister has the power to declare that a school is operating for profit or has operated for profit under section 83D of the Education Act 1990 (NSW) (the Act). Section 83E provides that after a declaration is made the Minister may suspend, reduce or impose conditions on the provision of financial assistance to a school that is operating, or has operated, for profit.

The matter was also referred to the NSW Police and the Australian Securities and Investments Commission (ASIC) to undertake a review of the School’s financial dealings and investigate possible illegal conduct by school board members.

The principal of the School disputed the Department’s findings that the School was operating for profit and challenged the decision, refusing to repay the funding.

In 2013 the Board of Studies recommended that the School be stripped of its registration after an investigation prompted by the initial audit revealed further problems including failing to provide a safe environment for students and running over its council-approved student limit.

The Board of Studies ordered that the School be barred from registering in 2014, however that decision was overturned.

The Federal Education Minister at the time said that if the School lost its registration the Federal Government would withdraw funding, but until that time it would continue to provide recurrent grant funding to allow the School to remain open.

2014 changes to the NSW Education Act

On 29 January 2015 new funding eligibility requirements commenced for all non-government schools that receive NSW government funding. The requirements are the result of amendments to the Act.

The amendments also included powers for the Minister for Education to declare that any financial assistance provided could be recovered as a debt if a school has operated ‘for profit’ and interest can be added to the unpaid amount.

In accordance with their new powers, the NSW Government asked the Supreme Court to force the School to repay their ‘debt’ plus legal costs and interest at 9%.

In response, the School recently launched a cross-claim, not only arguing that the Minister for Education doesn’t have the power to declare that the School was operating for profit or to recoup the funding, but also that in doing so the State Government has breached the federal Racial Discrimination Act 1975 (Cth) (Racial Discrimination Act).

The Sydney Morning Herald reports that the cross-claim also includes a submission that because the State had no power to declare that the School was operating for profit, the School was still owed State funding for the period of July 2012 to December 2013 (approximately $1.2 million).

Not-for-profit obligations for non-government schools

There is no prohibition on non-governments operating on a for profit basis, however if they do adopt a ‘for profit’ status, they will no longer be eligible for State funding.

The NSW Education Act prohibits the provision of financial assistance to schools that operate for profit. The Act also defines instances that indicate when a school is ‘operating for profit’, specifically conferring power on the Minister to make the decision.

The definition of not-for-profit has been made clearer and specifies, in summary, that:

• all income and assets must be used for the operation of the school;
• members of school governing bodies cannot be paid sitting fees; and
• all payments, including payments to related parties, must be at market value.

See our earlier article for more information on these new requirements.

In September the Department published guidelines for non-government schools to advise them on uses of school assets or income and financial practices or legal structures that could be considered ‘for profit’.

Racial discrimination

The School is challenging the NSW Government’s right to demand repayment of the funding.

The School has reportedly accused the State Government of breaching racial discrimination. It is unclear on what grounds the School intends to invoke the Racial Discrimination Act. That Act prohibits any act that involves a distinction, exclusion, restriction, preference, or a failure to supply goods or services based on race, colour, descent or national or ethnic origin. While there may be a grounds for such a claim against the State, it is unclear from reports on the case if there is any evidence of racial discrimination to invoke the Federal law to trump State legislation.

The Sydney Morning Herald reported that court documents quote the School alleging that the 2014 changes to the Act constitute racial discrimination and that as these changes enabled the Minister to declare that the financial assistance could be recovered as a debt, the School is not required to repay the money.

It is unclear if this latest line of argument by the School will succeed.

What can schools do to ensure compliance?

This battle between the School and the State of NSW is an unfortunate example of how administrative failures and legal matters can result in media attention and utlimately reputational damage.

Many jurisdictions are tightening the requirements that non-government schools must meet to fulfill a not-for-profit status and therefore be eligible to receive funding.

School governance policies that merely pay lip service to the school being ‘not-for-profit’ are insufficient evidence to show compliance with legal requirements. Schools should remain vigilant when it comes to their financial arrangements and records and be prepared for an audit at all times. A school’s system and procedures for assuring compliance with funding agreements or requirements should include specific checks and detailed records of where funding is being spent and the nature of those transactions.