With the current debate over state and federal government funding for non-government schools, many schools could be forgiven for forgetting one of the essential requirements for receiving that funding - the requirement that the school not operate for profit. With new amendments to the New South Wales Not-For-Profit Guidelines for Non-Government Schools (NFP Guidelines) having been released in December 2018, New South Wales non-government schools should be aware of the key changes that may affect their funding for 2019.

Background to the Not-For-Profit Guidelines

According to the NSW Department of Education, the NSW Government provides more than $1.3 billion annually to support non-government schools. Funding is provided in accordance with the Education Act 1990 (NSW) (Education Act) to non-government schools that are registered by the New South Wales Education Standards Authority (NESA) and that do not operate for profit.

Sections 83C to 83L of the Education Act provide the legislative basis that to be eligible for funding, non-government schools must not operate for profit. (These sections were added in to the Education Act after extensive reforms in 2014, as outlined in our previous article, as a result of a non-government school in Greenacre being found to operate for profit in 2012.)

Section 83C sets out that a school operates for profit if the New South Wales Minster for Education is satisfied that:

• any part of its proprietor’s assets (in so far as they relate to the school) or its proprietor’s income (in so far as it arises from the operation of the school) is used for any purpose other than for the operation of the school; 
• any payment is made by the school to a related entity or other person or body for property, goods or services at more than reasonable market value, that is not required for the operation of the school or 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; or
• any payment is made by the school to a person in connection with the person’s activities as a member of the governing body of the school unless it is in reimbursement for a payment made by the person in connection with the operation of the school.

The regulations may specify whether or not a school operates for profit because of any particular use of assets or income, any particular payment in relation to the school or any other matter. 

Under section 83I of the Education Act, the Minister has the authority to audit schools or proprietors at any time. Schools must cooperate with investigations and provide information to the New South Wales Department of Education as required.

Section 83L of the Education Act allows the Minister to publish guidelines to assist schools and proprietors to comply with this part of the Education Act. The NFP Guidelines are stated to have been developed to give clear guidelines to schools and proprietors in relation to the not-for-profit requirements. They were first published in September 2015.

2018 Changes

The Statute Law (Miscellaneous Provisions) Act (No. 2) 2018 (NSW) amended section 83C of the Education Act by adding definitions for certain financial accounting terminology ("asset", "income" and "payment") for the purposes of the prohibition on giving financial assistance to schools that operate for profit.

The NSW Department of Education released a revised set of NFP Guidelines dated December 2018.

Updated NFP Guidelines

Changes to the NFP Guidelines include:

• a restructure of the NFP Guidelines to emphasise the importance of demonstrating compliance and separating out the different payments that a school makes as a consumer and as a proprietor
• expanding the requirement for reasonable market value transactions to include warranties, installation costs, ongoing maintenance, procurement standards and local government requirements
• new policies and procedures required for Land (Mortgages and Loans), Ground Rent/Leases for unimproved Land and Plant and Equipment
• an increased focus on common payments and financial transactions with credit/monetary loans, outstanding debts and school fundraising and donations targeted as requiring specific new evidence.

It should be noted that in the updated NFP Guidelines "asset" and "income" are given updated definitions but they are different to the definitions in the amended section 83C of the Education Act referred to above. 

The NFP Guidelines are also re-worded so that the proprietor's obligations (as distinct from the school's) are highlighted.

What Should Schools Do Now?

Schools should be aware of these changes and implement policies and procedures in time for their next registration review.

As most non-government schools in New South Wales would know, NESA is responsible for monitoring the compliance of non-government schools with the registration and accreditation requirements of the Education Act. This includes compliance with the NFP Guidelines for the purposes of sections 83C to 83L of the Education Act. 

In general, non-government schools should be able to demonstrate compliance with the NFP Guidelines by having policies and business records for:

• implementation of appropriate financial controls and governance systems to manage the financial affairs of a school
• financial transactions and decisions that are transparent, at arm's length and at reasonable market value
• conflicts of interest between personnel and related entities being appropriately managed in relation to school operations
• audited annual financial statements.

Given the severity of the consequences of non-compliance, non-government schools in New South Wales must ensure that their policies in relation to financial management are compliant with relevant laws and regulations and, most importantly, that these policies are fully implemented within the school. The ability to produce a policy is not enough in this area to demonstrate that a school is meeting its requirements. A school must have the ability to consistently produce the required documentary evidence that their school is managing its finances in order to maintain ongoing government funding.