As we outlined in our earlier article regarding funding for non-government schools in NSW, Non-government schools – how can you spend your money?, a number of non-government schools, both large and small, have recently come under scrutiny for their financial operations.

Like in NSW, Victorian non-government schools are required to operate as not-for-profit to be eligible to receive funding from the government.

Non-government schools receiving financial assistance should ensure that they understand their obligations under relevant legislation and structure relationships and agreements accordingly so as not to compromise their not-for-profit status.

Below we consider in more detail some of the main obligations of non-government schools in Victoria under Victorian and Commonwealth legislation.

Funding from the Victorian Government

In Victoria, funding of non-government schools is governed by part 2.7 of the Education and Training Reform Act 2006 (Vic) (Victorian Act). In order to receive funding, non-government schools must be registered under part 4.3 of the Victorian Act.

Under the Education and Training Reform Regulations 2017 (Vic) (Victorian Regulations), one of the minimum requirements for registration is that the school must be not-for-profit. Registered schools must ensure that school property and assets are not distributed or used for the profit or gain of another person or entity.

It is important to remember that any conditions imposed on financial assistance must be complied with. Further, non-government schools may be required to provide a report in relation to the application of the funding.

Funding from the Commonwealth Government

Commonwealth funding of non-government schools is governed by the Australian Education Act 2013 (Cth) (Commonwealth Act). In order to receive Commonwealth funding, non-government schools are required to be an ‘approved authority’ under part 6 of the Commonwealth Act.

One of the basic requirements to be an approved authority is to be a school that is not conducted for profit. It is also a requirement that schools are financially viable.

Under the Australian Education Regulation 2013 (Cth) (Commonwealth Regulations), funding must be spent for the purpose of providing school education at the school.

Schools are permitted to spend Commonwealth funding on:

• salaries and other expenses relating to staff at the school;
• developing materials relating to the school’s curriculum;
• general operating expenses of the school;
• maintaining the school’s land and buildings;
• purchasing capital equipment for the school; and
• administrative costs associated with the school’s compliance with the Commonwealth Act and Commonwealth Regulations.

Schools are not permitted to spend Commonwealth funding on:

• security for any form of loan, credit, payment or other interest;
• any litigation, except litigation by a State or Territory to recover a debt from the school;
• the purchase of land or a building for the school;
• the construction of a building or part of a building for the school;
• capital improvements for the school; or
• any form of loan, credit or other interest in relation to expenditure for the above.

When is a non-government school ‘not-for-profit’?

Under the Victorian Regulations, a not-for-profit school is a school that satisfies all of the following criteria:

• the school is not established for the purpose of profit or gain;
• the proprietor of the school (for example, the owner) does not conduct the school for the purposes of the proprietor's or any other person's profit or gain;
• no part of the profit or gain made in the conduct of the school is distributed to any person or entity;
• all money and property received for the conduct of the school are applied solely toward the conduct of the school in accordance with the school's not-for-profit purpose;
• the school or the proprietor is not a party to a ‘prohibited agreement or arrangement’;
• on the closure of the school, any surplus assets remaining after payment of the school's liabilities are required by the constitution or rules governing the school to be –
  • used by the proprietor of the school for providing education services to children of compulsory school age or for other not-for-profit purposes; or
  • given to a not-for-profit entity operating within Australia that provides education services to school children or that has similar not-for-profit purposes to the proprietor.

Under the Commonwealth Regulations, when determining whether a school is not-for-profit the following considerations are relevant:

• whether the school has not-for-profit status;
• 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 its functions; and
  • has been distributed (whether directly or indirectly) to an owner of the school 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.

Prohibited agreements or arrangements

Non-government schools must ensure that there is a legally binding written agreement for any loans or arrangements for services to the school on commercial terms. The Victorian Regulations specify agreements or arrangements with the following purposes to be prohibited:

• to pay or divert any profit or gain made in the conduct of the school to the proprietor or any other person or entity;
• payment to another person or entity which is:
  • not of reasonable market value;
  • a gift, loan or similar payment unconnected to the conduct of the school; or
  • not made in good faith for the benefit of the school.

Record keeping

Non-government schools should ensure they hold and maintain records of their compliance, including:

• the school's not-for-profit status in the form of a statutory declaration;
• copies of agreements, contracts or arrangements with third parties, related entities and any affiliated organisations (for example, affiliated religious groups), including the details of the relationship;
• audited annual financial statements and documentation that shows school expenditure is transparent, at arm’s length and of reasonable market value; and
• policies and procedures for the management of the school’s financial affairs and conflicts of interest, appropriate financial controls and governance systems.

Consequences

Similar risks apply for Victorian non-government schools as those in NSW.

These risks include:

• 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; and
• action being taken 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.