Earlier this year, an independent school in NSW came to the attention of the media and then the NSW Department of Education because, reportedly, the school planned to install a private plunge pool at the principal's residence and had recently sent senior staff to the UK for a rowing event (including the principal and his wife) on business class flights.
This sparked concerns that the school was not using its funds (including funds received from government) appropriately.
Independent schools in NSW operate within a complex legislative framework, which requires schools (as charities) to operate on a 'not for profit' basis if they want to remain eligible to receive charitable tax exemptions, and to receive state and federal government funding. But what does it mean to operate 'not for profit'?
Generally, a not-for-profit is an organisation that does not operate for the profit, personal gain or other benefit of particular people, such as the members of the organisation, the people who run it (the board or committee members) or their friends or relatives.
Schools that are registered charities must comply with the Australian Charities and Not-for-profits Commission ('ACNC') Governance Standards. Schools that receive government funding must also 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). In this context, the media suggested that a private plunge pool for a principal didn't pass the 'pub test'.
While some schools (such as religious schools) may be considered to be at greater risk of breaching section 83C, all NSW schools must comply with these provisions, or risk jeopardising their funding (including past funding). A school that breaches section 83C may also find itself in breach of the Australian Education Act 2013 (Cth), which will impact federal funding as well as state funding.
There are also similar 'not for profit' requirements that apply to schools in the other Australian states and territories. In Victoria, Regulation 7 of the Education and Training Reform Regulations 2017 (Vic) provides a comprehensive definition of a 'not-for-profit' school that is perhaps even more prescriptive than the definition in section 83C. School proprietors that operate across multiple states and territories must take care to ensure each school they operate complies with the requirements that apply in the relevant jurisdiction.
ACNC Governance Standards
The ACNC requires all registered charities to comply with the ACNC Governance Standards. Charities must first be registered with the ACNC to be endorsed by the Australian Taxation Office as income tax exempt. Most schools are registered as charities with the ACNC with the purpose of advancing education. Schools may also be registered with a secondary purpose such as advancing religion.
ACNC Governance Standard 1 requires registered charities (including schools) to demonstrate they were set up as a 'not for profit', are actually run as such and are working towards their charitable purpose. Standard 5 sets out the duties that apply to the responsible persons for a school (being the board members or school council members), including the duty to act honestly and fairly in the best interests of the school and for its charitable purpose.
However, these 'not for profit' requirements apply to all registered charities. There are further legislative requirements and definitions of 'not for profit' that apply to independent schools in NSW.
Education Act 1990 (NSW)
Section 83C of the Education Act 1990 (NSW) (the 'Act') states that to be eligible to receive government funding, independent schools must not operate 'for profit'. The not-for-profit definition specifies that:
- School income and assets are not to be used for a purpose other than the operation of the school.
- All payments, including to related parties, are to be at reasonable market value and must be required for the running of the school.
- Payments must be reasonable given that financial assistance is being provided to the school.
- Payments to members of school governing bodies (such as directors or members of the school council) are prohibited.
A school that does not comply may be declared to be 'operating for profit' by the Minister under section 83D of the Act (a for-profit declaration), with consequences such as government financial assistance being cancelled and the Minister taking action to recover past funding (during any period the school was determined to be operating for profit).
A school may also be declared 'non-compliant' under section 83F of the Act (a non-compliant declaration). A school will generally be declared non-compliant if it:
- fails to provide reasonable assistance to an investigation under Division 3 of the Act,
- fails to comply with a direction from the Minister under Division 3 of the Act, or
- because of any other circumstances set out in the Education Regulation 2017 (NSW).
The Minister may only make a for profit declaration or a non-compliant declaration on the recommendation of the Non-Government Schools Not-For-Profit Advisory Committee.
Under the Act, the Minister may publish guidelines to assist schools to comply with the not-for-profit requirements. The Not-For-Profit Guidelines for Non-Government Schools were most recently updated in June 2019.
The Guidelines contain some general advice about determining market value and dealing with related party transactions. The Guidelines also contain specific advice in regard to certain situations and transactions (separated into two broader categories) that are likely to arise from time to time:
- Payments for Goods and services, including:
- School related travel
- Payments to school board members
- Intellectual property
- Consultancy and professional services
- Outstanding debts and credit/loans
- Fundraising, donations (including dealings with Parents & Friends/Citizens associations)
- Leases and ground leases
- Buildings and related works
- The use of School/proprietor assets:
- Shared or joint use of assets
- Use of income for ancillary services
- Leasing school owned property/assets
- Disposing of property/assets
If you are concerned about a proposed (or past) school transaction or activity, we recommend first checking the Guidelines to see what advice they provide in regard to whatever issue you are facing.
If the Guidelines are not sufficient, there are further resources available to schools. The Non-Government Schools Not-For-Profit Advisory Committee publish periodic newsletters which can be found on the Department's website.
Schools are encouraged to take a proactive approach to managing compliance. School representatives may contact the Non-Government Schools Not-for-Profit Advisory Committee Secretariat or their independent sector bodies (e.g., AIS NSW and CSNSW) for further advice and support.
Good governance should be at the heart of all school operations and embedded in your school's culture. Our top tips for avoiding a breach of section 83C include:
- Understand the ACNC governance standards that apply to charities
- Ensure Responsible Persons (such as school board members and the principal) meet the fit and proper person requirements
- Keep all relevant records relating to transactions
- Review the school's policy framework with regard to procurement, conflicts, related party transactions and the conduct of school board members
- Use freely available resources and seek help when necessary
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.