The NSW State Government provided more than a billion dollars in funding to Non-Government schools in 2014-2015. To give the community confidence that government funding is not provided to Non-Government schools operating for profit, the NSW Government strengthened the current not-for-profit school requirements under Section 21A of the Education Act 1990, by introducing a new bill. The new bill, the NSW Education Amendment (Not-for-Profit Non-Government Funding) Bill 2014 (the new Act) was introduced and passed in the NSW Parliament in October 2014. Section 21 of the Education Act 1990, will now be renumbered and transferred to Section 83 in the new Act.

Key requirements of the new Act:

Section 83C makes clear that the Minister must not provide any financial assistance to a for profit school.

"Section 83C (2) indicates that a school operates for profit (without limiting the circumstances in which it does so) if the Minister is satisfied that:

  1. 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, or
  2. any payment is made by the school to a related entity or other person or body:
    1. for property, goods or services at more than reasonable market value, or
    2. for property, goods or services that are not required for the operation of the school, or
    3. for property, goods or services 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 by the Minister, or
  1. 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."

What are the key differences with previous Section 21A requirements

The key changes are as follows:

  • Section 21A provided for an exclusion to payments made above market value to related parties that are also not-for-profit organisations. This exclusion has been removed with Section 83C and all transactions will now need to be at or below market value. This will have an impact on transactions between the school and church for example and can include transactions such as sharing of utility costs.
  • The new Section 83C added a new test in that expenses should not be seen as unreasonable taking into consideration the Government Funding provided to the school. What would constitute as unreasonable is still unclear and could include unreasonably high salaries compared to other schools or excessive entertainment expenses or even elaborate buildings.
  • Section 21A did allow the payment of an honorarium to Governing Board members (i.e. Directors / Board members / Councillors), this allowance has been removed in Section 83C and now only allows the reimbursement of reasonable expenses.

Section 83C (3) allows for the formulation of regulations at a later stage to provide further guidance on uses of school assets or income, financial practices or legal structures that could be considered for profit.

Not-for-Profit Advisory Committee

One of the key changes is the establishment of a Not-for-Profit Advisory Committee. The Advisory Committee will consist of:

  • an independent chairperson
  • a representative from the Association of Independent Schools
  • a representative from the Catholic Education Commission
  • a representative from BOSTES, the NSW Board of Studies
  • a representative from the Department of Education, and
  • any other persons appointed by the Minister.

The Advisory Committee will review issues identified with possible non-compliance to the not-for-profit provisions of the Act and will make recommendations to the Minister if a school is considered non-compliant or operating for profit. The Advisory Committee will also assist the Minister in developing guidelines to assist schools to better understand their responsibilities under Section 83.

New Powers for the Minister

Section 21A only had one possible outcome for any breach even if minor and that was to cease funding to the school. Under Sections 83C (3) and 83E (3) the Minister can now apply graduated responses to less serious breaches or minor breaches such as an oversight or error. The graduated responses can include:

  • withholding part of the school's funding; or
  • funding the school on a month to month basis until the for profit conduct is rectified; or
  • impose conditions on the provision of funding e.g. certain financial management actions.

The new Act also now provides for two categories of non-compliances as follows:

  • declaration of a school as for profit; or
  • lesser breach declaring a school as non-compliant with not-for-profit conditions.

A school declared as operating for profit is for serious breaches of the Act only and will lead to funding being withdrawn. For non-compliant schools the Minister will have the option to impose any of the graduated response as noted above.

Directions by the Minister

Under the new Act the Minister can give directions to schools, these could include:

  • agreeing to an audit,
  • provide access to the schools records, and
  • requiring a school to pay for an audit.

Key recommendations

As a starting point to ensure compliance with the new Act schools should review the following key points.

  • Ensure that your school is a registered charity with the ACNC.
  • Review any activities that falls outside the definition of a school i.e. primary school, secondary school or combined school. These could include preschool / kindergarten, teacher education centre for teachers from other schools, adult education. Review funding of these other activities and ensure that the school is not cross subsidising these other activities.
  • Ensure that the school has paid no more than market value for any property, goods or service. Specifically review transactions with related parties e.g. how are utility bills split with the church. When a parent completes work for the school does the school have the work valued to ensure that the payment made does not exceed market value? Does the school have a purchasing / procurement policy that requires the school to obtain quotes or tenders for purchases exceeding a certain amount?
  • Ensure that no income or assets are used for a purpose other than required for the operation of the school.
  • Ensure the school only purchases property, goods or services that are required for the operation of the school.
  • Confirm that all expenses for property, goods or services are reasonable when considering the financial assistance provided by Government i.e. excessive salaries, entertainment or traveling expenses or assets.
  • Ensure that no Board / Council Member have received any payments other than reasonable reimbursement of expenses for services as a Council / Board Member?

Governments and the community are requiring far more open and transparent reporting and accountability for funding provided to organisations and this is no different for schools. In addition looking at some of the requirements within the new Act, such as reasonability of expenses, schools would need to manage not only the evidence based substantiation of expenses, but also the community views of acceptable use of funds.

We therefore recommend that all schools review their policies and procedure frameworks as well as overarching Governance structures to ensure full compliance with the requirements of the new Act. This review should be followed by a training program for all school employees as well as key employees within interrelated organisations such as the church.

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