In brief - Schools should understand the risks that come with their not-for-profit status and associated regulatory obligations, particularly in the areas of related party transactions and ancillary services. 

The New South Wales Government recently released the latest edition of Not-For-Profit Guidelines for Non-Government Schools.

The purpose of the Guidelines is to assist schools in receipt of NSW Government funding to understand the not-for-profit funding requirements under the Education Act 1990 (NSW) (Act). The Guidelines also give explicit direction to schools in relation to certain areas of their operations, including related entity transactions and the provision of ancillary, non-school related services.

What are the Statutory Obligations for Schools?

Section 83C of the Act states that the Education Minister 'must not provide financial assistance to or for the benefit of a school that operates for profit'. 

The Act outlines how a school can operate for profit 'without limiting the circumstances in which it does so'. Section 83C(2) states that a school 'operates for profit' if the Minister is satisfied that:

a) any part of its assets or income is used for any purpose other than for the operation of the school, or 

b) any payment is made by the school to a related entity or other person or body: 

i. for property, goods or services at more than reasonable market value, or 

ii. for property, goods or services that are not required for the operation of the school, or 

iii. for property, goods or services that is in any other way unreasonable in the circumstances, or 

c) 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.

A school that fails to comply with its not-for-profit obligations may be declared as operating for profit by the Minister under section 83D of the Act. The school may then have the following sanctions imposed:

  • cancellation of government financial assistance;

  • a formal investigation of both the school and school's proprietors;

  • be declared a non-compliant school under section 83E(3) of the Act.

The Minister may also take action to recover any government funding provided while the school was operating for profit.

Following an investigation into a school's financial activity, the school may also then be declared non-compliant under section 83F of the Act. A school will be declared non-compliant if, following an investigation, it fails to provide reasonable assistance to the conduct of that investigation, fails to comply with a direction from the Minister or because of any other circumstances set out in the regulations on recommendation from the Non-Government Schools Not-For-Profit Advisory Committee. 

Payment for Property, Goods or Services - Related Entities

The Guidelines explain the risks for schools when they transact with their 'related entities'. The Guidelines define 'related entity' as

a person or legal entity that is related to a proprietor or school either as a result of office, membership, management, control or influence or a personal/familial relationship and includes but is not limited to:

(a) a person or close member of that person's family is a related entity if that person:

(i) has control or joint control over the proprietor or school;

(ii) has significant influence over the proprietor or school;

(iii) is a member of the key management personnel of the proprietor or school.

(b) an entity is a related entity to a proprietor or school if any of the following conditions apply:

(i) the entity and the proprietor or school are members of the same group;

(ii) the entity is an associate or joint venture of the proprietor or school.

(iii) the entity and the proprietor or school are joint ventures of the same third party;

(iv) the entity is a joint venture of a third entity and the proprietor or school is an associate of the third entity;

(v) the entity is controlled or jointly controlled by a person identified in (a);

(vi) a person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or parent of the entity);

(vii) the entity, or any other member of a group of which it is a part, provides key management personnel services to the proprietor or school or to the parent of the proprietor or school.

(c) an employee of the proprietor, school or any entity identified in (b).

Related entity transactions involve the transfer of resources, services, liabilities or obligations between a school to a related entity of the school. Common related entity transactions that non-government schools engage in involve a school transacting with its governing body or association, or another school within its association or umbrella organisation. One example is a school renting a premises that is owned by its governing body.

The Guidelines indicate that related party transactions are an area of risk for schools. These transactions can potentially be used to shift wealth and resources from the school to its related entities. The Guidelines recommend that schools have conflict of interest and corruption policies as well as a clearly defined process detailing how reasonable market value can be demonstrated. 

Reasonable Market Value

When a school enters into a transaction with a related entity, the terms of the transaction must be at 'reasonable market value'. 'Reasonable market value' is defined in the Guidelines as 'the price that a knowledgeable and willing third party would pay for property, goods or service in an arm's length transaction from the seller'.

A school can be classed as operating for profit under section 83(2)(b)(i) of the Act if any payment is made by a school to its related entity 'for property, goods or services at more than reasonable market value'. To use the example above, a school may be non-compliant if they rent their premises from their governing body at an amount greater than reasonable market value.

Schools should take steps to manage the risk of being classed as operating for profit when dealing with related entities. Schools should also take steps to prove the reasonable market value of related entity transactions. This can include having policies and procedures in place for related party transactions, using a tender process for high-value items or long-term contracts and seeking more than one independent valuation report. 

School Assets and 'Ancillary Services'

The previous edition of the Guidelines was published in December 2018. This edition left questions about how schools should treat childcare and other secondary services that are provided through the school. The latest Guidelines clarify this issue.

The Guidelines advise caution for schools that provide 'ancillary services' that fall outside the normal operations of the school. Ancillary services can include childcare, long day care, early learning centres, preparatory school programs, out of school care or vacation care.

The Guidelines are prescriptive in how schools should provide these services to comply with their not-for-profit obligations. Schools should carefully consider what ancillary services they provide and the way that these services are provided. Schools should critically assess the delivery of these services in light of the Guideline's directions.

The Guidelines state:

For commercial (for profit) providers of ancillary services:

  • no proprietor or school income is used to pay for the provision of ancillary services; and

  • any use of a proprietor's or school's assets for the provision of ancillary services must be at least reasonable market value.

For not-for-profit providers of ancillary services:

  • no proprietor or school income is used to pay for the provision of ancillary services unless the provider of ancillary services directs their assets (surplus funds) back to the proprietor or school; and

  • any use of a proprietor's or school's assets for the provision of ancillary services must not cause the proprietor or school to incur a material liability.

Conclusion

Schools face a dense matrix of regulation to navigate through. Failure to comply with not-for-profit obligations can have significant financial consequences. Schools risk losing their government funding or the prospect of having to repay government funding received over periods of non-compliance. It is important that schools are aware of the risks that come with their not-for-profit status and associated regulatory obligations, particularly in the areas of related party transactions and ancillary services.

This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2019.

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