It is important to remember non-government schools that receive financial assistance from the government are subject to very strict legislative requirements about how they can spend funds (including funds that have not been provided by the government).

In NSW, non-government schools are under an obligation to operate as a not-for-profit. They must not use funds for any purpose other than as necessary for the operation of the school. Further, where the non-government school has a proprietor, any part of the proprietor’s assets or income that relate to the school must also only be used for the operation of the school.

Non-government schools receiving government funding that are found to be operating for profit risk penalties including losing their financial assistance and being required to repay any government funding they received during the period in which they were operating for profit (see below).

Below we will consider in more detail the obligations of non-government schools in NSW under the Education Act 1990 (NSW) (NSW Act), the Education Regulation 2017 (NSW) (NSW Regulations), the Australian Education Act 2013 (Cth) (Cth Act) and the Australian Education Regulation 2013 (Cth) (Cth Regulations).

Defining ‘for profit’

Non-government schools must not operate for profit if they wish to continue receiving government funding. This means that non-government schools cannot just operate in the same manner that other commercial businesses may operate.

Under s 83C of the NSW Act, non-government schools receiving NSW state funding will be considered to be operating for profit where:

• the school or its proprietor’s assets or income that arise from the operation of the school are used for any purpose other than the operation of the school
• the school makes any payment to a related entity or other person or body for property, goods or services that:
  • is more than reasonable market value
  • are not required for the operation of the school
  • are in any other way unreasonable in the context of the government financial assistance
• the school or its proprietor has made any payment to a person for the person’s activities as a member of the governing body of the school that are not in reimbursement of a payment made by the person for the operation of the school.

Commonwealth funding and under s 26 of the Cth Regulations, the following will be relevant considerations as to whether a non-government school is operating for profit:

• whether the school has not-for-profit status under a law of the Commonwealth, a State or a Territory
• the existence and quality of the school’s financial policies and practices
• whether money derived from or relating to the school:
  • has been applied for the purposes of the school or for the purposes of the functions of the authority or body
  • has been distributed (whether directly or indirectly) to an owner of the authority or body, or any other person
• if the school is a body corporate – the requirements in any legislation under which the school is established, or in the school’s constitution.

Guidelines – dos and don’ts

In light of the above, non-government schools that receive government funding must be conscious of the above requirements when spending or committing any funding, and ensure they have good supporting policies and records.

In addition to the above, under the Cth Regulations a non-government school should not:

• use funds as security to obtain, or comply with, any form of loan, credit, payment or other interest
• use funds for the preparation of or in the course of any litigation (except for litigation by a State or Territory to recover a debt from an authority or body)
• make any payment to or have any dealings with a related entity or other person or body for property, goods or services above market value, including without expenditure of money.

Under the Cth Regulations, non-government schools can spend money on:

• salaries and other expenses relating to staff at the school, including professional development
• developing materials for the school’s curriculum
• general operating expenses of the school
• maintaining the school’s land and buildings
• purchasing capital equipment for the school.

Under the NSW Regulations, non-government schools may also:

• make a reasonable payment to a student for a prize, scholarship or other activity as a student of the school
• make a funding contribution to the National Redress Scheme for Institutional Child Sexual Abuse, if the school demonstrates that the funding contribution does not comprise any money provided by the Minister.

Generally speaking, schools should not:

• use money to fund personal travel
• make a loan to a staff member or non-school entity
• buy property not for the purpose of school operations.

Record keeping

Non-government schools must be able to demonstrate their compliance by ensuring their policies and business records are kept and made available if requested, including:

• policies and procedures for the management of the school’s financial affairs, appropriate financial controls and governance systems
• documentation showing that school expenditure is transparent, at arm’s length and of reasonable market value
• management procedures for conflicts of interest that arise between school personnel and related entities
• records of audited annual financial statements.

For further guidance on common types of financial transactions made by schools, what constitutes reasonable market value and examples of records or policies that may be kept, see the NSW Department of Education Guidelines.

Consequences

Non-government schools that fail to comply with their not-for-profit requirements risk:

• formal investigations of both the school and its proprietors
• conditions being imposed on any future government financial assistance
• cessation, or a reduction, of government financial assistance
• action being taken by the relevant government agency to recover any financial assistance that was paid to the school during a non-compliant financial year. This includes all government funding, not just the proportion of funding that was spent in a for profit manner.