NSW Non-Government Schools: NESA Audit & Compliance Guide

Introduction

For any NSW non-government school, operating on a not-for-profit basis is a fundamental condition for its eligibility to receive government financial assistance. These not-for-profit requirements, established under the Education Act 1990 (NSW) (‘Education Act‘), ensure that all income and assets are used for the school’s educational purposes, which is essential for maintaining compliance and public confidence.

Recent amendments to the Education Regulation 2017 (NSW) (‘Education Regulation‘) have provided greater clarity on these not-for-profit rules, but navigating the complexities of financial management and regulatory oversight remains a critical responsibility for school proprietors. This article explains these obligations, outlines permitted activities, and provides guidance on preparing for a NSW Education Standards Authority (NESA) audit to help a non-government school maintain its school funding eligibility.

Interactive Tool: Check Your School’s Not-For-Profit Compliance & Funding Eligibility

NFP Rules for NSW Non-Government Schools

The Operation of a Non-Government School

Under Section 83C(2)(a) of the Education Act, a non-government school is considered to operate for profit if its assets or income are used for any purpose apart from the school’s operation. This rule ensures that all resources are dedicated to the school’s educational purpose.

The concept of the operation of the school is broad, covering:

• Delivering education to students.
• The administration of the institution.

Furthermore, payments for goods or services must be required for the school’s operation, as stipulated in Section 83C(2)(b)(ii) of the Education Act. Determining whether an expense is a requirement depends on the following factors:

• The specific circumstances of the non-government school.
• The institution’s educational objectives.
• Fulfilling the school’s stated educational purpose to maintain not-for-profit status and funding eligibility.

Reasonable Market Value for Goods & Services

A non-government school will be deemed to operate for profit if it pays more than reasonable market value for property, goods, or services, according to Section 83C(2)(b)(i) of the Education Act.

This value is defined as the price a knowledgeable and willing person would pay in an arm’s length transaction, where both parties are independent and acting in their own best interest.

Ultimately, this principle is fundamental to not-for-profit compliance. When purchasing real property, obtaining an independent market valuation from a qualified expert is strongly recommended.

This is especially important in transactions involving a related party, as these carry a higher risk of for-profit activity and require comprehensive documentation to demonstrate fairness.

For goods and services, several factors can influence what is considered reasonable market value:

• The quality, safety, and consistency of the goods or services.
• The location of the non-government school.
• Urgent requirements or specific timeframes, such as work needed outside business hours.
• Whether the goods or services are in short supply.
• The types of warranties provided with the purchase.

To ensure payments align with market rates, a more rigorous procurement process, such as obtaining multiple quotes or conducting a formal tender, should be followed for higher-value transactions.

Unreasonable Payments & Governing Body Remuneration

Section 83C(2)(b)(iii) of the Education Act states that a school operates for profit if it pays for property, goods, or services that is otherwise unreasonable, considering that it receives financial assistance from the Minister. The assessment of whether a payment is unreasonable is based on the specific facts and circumstances of the transaction.

Additionally, there are strict not-for-profit rules regarding payments to members of a school’s governing body. Under Section 83C(2)(c) of the Education Act, a payment made to a person for their activities as a member of the governing body is strictly prohibited.

However, there are specific guidelines regarding allowable payments:

If a board member also holds a paid position (such as a teacher), they may only be remunerated for their employment duties, not for their governance role, raising the important question of when can Australian charity board members receive remuneration.

The only exception is for the reimbursement of legitimate expenses the person paid in connection with the school’s operation.

Permitted Activities Under the Updated NFP Requirements

Joint Use Agreements & Future Facility Arrangements

The Education Regulation allows a non-government school to enter into arrangements with third parties for the shared use or future development of facilities. These provisions offer clarity for schools seeking to collaborate with other organisations without breaching not-for-profit requirements.

Specifically, there are two types of arrangements permitted:

• Under Regulation 10C, a school can partner with another entity for Joint Use Arrangements to acquire, develop, or maintain facilities that are owned by the school or jointly owned. The partner can use the facilities, provided it does not negatively impact the school (for example, a school might co-fund a car park upgrade with a neighbouring church for shared use).
• Regulation 10D permits Future Use Arrangements, allowing a school to contribute to the development of facilities that will be owned by another person or entity. In return, the school must be entitled to use those facilities, such as helping a commercial operator build a swimming pool that students will be able to use.

For these arrangements to maintain compliance, the benefit the school receives must be reasonably proportionate to the costs it incurs. Furthermore, any payments made must be for the operation of the school and not exceed reasonable market value.

Community Use of School Premises

A non-government school is permitted to make its facilities available for community purposes without affecting its not-for-profit status. Regulation 10E of the Education Regulation specifies that a school does not operate for profit if it offers its premises at no cost or below reasonable market value to certain groups.

These groups include:

• Other schools
• Local councils or government agencies
• Not-for-profit organisations and community groups
• Members of the public for recreational activities or other purposes that benefit the local community

A critical condition for these arrangements is that the community use must not limit or restrict the normal operation of the school. For instance, allowing a local group to use the school hall on a weekend is acceptable, but not if it interferes with scheduled school activities.

Conversely, if a school leases its facilities to a commercial or for-profit entity, it must charge a fee that is at least at reasonable market value.

Recognised Education & Care Programs

Under Regulation 10B of the Education Regulation, a non-government school can use its assets and income to provide recognised education and care programs. These programs are intended for children who attend the school or are likely to attend in the future.

Permitted programs include:

• Preschool programs and long day care
• Out-of-school-hours care
• Transition-to-school programs and playgroups

Several conditions apply to ensure compliance when operating these programs:

• Financial assistance provided by the Minister cannot be used for these programs.
• Any income generated must be used for the operation of that program or for the operation of the school.
• Payments made for property, goods, or services related to the program must be at reasonable market value and necessary for its operation.

Guidelines for Charitable Fundraising & Equipment Donations

The Education Regulation provides specific allowances for schools to engage in charitable activities. These rules permit both the donation of old equipment and the use of school assets for fundraising efforts.

Under Regulation 10F of the Education Regulation, a non-government school is permitted to donate equipment that is completely or substantially depreciated or no longer required for school purposes.

Such donations can be made to another school, a charity, or a local council. Additionally, the school may also pay for reasonable costs associated with the donation, such as transportation.

Furthermore, Regulation 10G of the Education Regulation allows a school to use its assets to raise funds for an external charity, an activity that must comply with specific laws governing charity fundraising and donations. This is permitted as long as the fundraising activity does not adversely affect the school’s operations.

It is important to note that the funds donated to the charity must be from the money raised by the school community and cannot include the school’s own income.

Compliance in Common Financial Transactions

Managing Property Acquisitions & Leasing Arrangements

A non-government school can purchase property for its current or future needs, a process that often requires to be specialised NFP and charity property law advice, provided the acquisition is for the operation of the school.

Furthermore, land can be acquired for future expansion, such as a new campus or to accommodate more students, even if it cannot be used immediately. When making these purchases, schools must ensure that:

• The payment does not exceed reasonable market value.
• The purchase remains strictly for the school’s operational purposes.

To demonstrate compliance when acquiring property, a non-government school should maintain appropriate records, such as:

• Business records showing the need for the property, like governing body minutes or strategic plans.
• Documents evidencing land valuations and the intended use of the land.
• Evidence that any conflicts of interest, particularly with related parties, have been managed appropriately.

When a school leases property from a third party, the arrangement must be for the operation of the school, and lease payments must be at no more than reasonable market value.

Conversely, if a school leases its property or assets to a third party (such as a canteen or uniform shop operator), specific conditions apply:

• The lease must support the school’s operation.
• It must generate income at or above reasonable market value.
• Any income from such leases must be used exclusively for the school’s operation.

Ensuring Compliance for Salaries & Professional Consultancy Services

The payment of salaries and remuneration packages, a matter governed by charity and NFP employment law, must be required for the operation of the non-government school. Because the school receives financial assistance, these payments must adhere to strict guidelines:

• They must not be more than reasonable market value.
• They cannot be unreasonable in the circumstances.

While market value for salaries can be influenced by various factors, each case should be supported by appropriate documentation.

Records that help demonstrate compliance for salaries include:

• Clearly defined and documented employment contracts.
• Industrial awards or enterprise agreements.
• School Human Resources (HR) policies and procedures.
• Documentation explaining how the school determined the salary is at a reasonable market value.

Similarly, when engaging consultants or other professionals, the services must be required for the school’s operations. To maintain compliance in these arrangements:

• Payments must be at no more than reasonable market value.
• Schools must exercise caution when purchasing services from a related party to ensure the transaction is at arm’s length.

Implementing Shared Services Agreements

A shared services agreement allows multiple schools to receive operational or educational services from a single provider.

For a non-government school to maintain eligibility for funding, payments under these agreements must meet specific criteria:

• They must be for services required for its individual operation.
• Payments must be at no more than reasonable market value.
• The arrangement should not subsidise services for any other organisation.

The following factors are considered when determining if a shared services agreement meets not-for-profit requirements:

• The terms are flexible, ensuring each school only pays for the services it requires.
• The agreement is well-documented, clearly identifying services and costs.
• The agreement provides for itemised billing for each participating school.
• Payments made by each school are at no more than reasonable market value.

NESA Audits & The Single-Theme Audit Program

The Purpose of the Annual Audit of Financial Affairs

The NESA undertakes an annual audit of financial affairs program, a process for which schools should prepare, much like they would prepare for an ACNC compliance review, as a key component of its regulatory activities.

This program monitors whether a non-government school is meeting the not-for-profit requirements under the Education Act. These audits are designed to achieve the following objectives:

• Support transparency across the sector.
• Maintain public confidence.
• Allow for the early identification of financial risks.

NESA uses a risk-based approach to select which proprietors or schools will undergo an audit. Furthermore, these audits are conducted by independent external consultants on behalf of NESA.

Specific factors that may lead to audit selection include:

• The establishment of a new non-government school.
• Involvement in significant transactions, such as large capital projects.
• Identified risks related to shared services agreements.
• Trends observed in financial data or previous compliance matters.

The Current Audit Focus on Third-Party Service Contracts

The single-theme audit program for 2026 concentrates on significant payments made by a non-government school for third-party service contracts.

This targeted approach provides clarity for schools and reduces the administrative burden of the audit process. The specific areas currently under review are contracts related to:

• Construction
• Security
• Information and communications technology (ICT)
• Cleaning

To ensure compliance with not-for-profit requirements during these audits, a non-government school must demonstrate two key factors:

The payments must not be above reasonable market value.x process, as each case is determined by its specific facts and circumstances.

Payments for these services are strictly for the operation of the school.

Regulatory Actions Impacting School Funding Eligibility

Response to Investigations & Written Directions

NESA may carry out an investigation, a serious matter that can lead to a formal NFP or charity dispute, into a non-government school or its proprietor if there is a suspicion that the school is operating for profit or is otherwise non-compliant. This action is taken only after consultation with the Non-government Schools Not-for-profit Advisory Committee.

In exceptional circumstances, the Minister may defer all or part of a school’s funding while an investigation is in progress.

To address compliance issues, NESA can issue written directions to a school or proprietor. A direction may require a non-government school to take specific actions, including to:

• Undergo an audit of financial affairs.
• Provide specified information about the school’s or proprietor’s affairs.
• Cease any conduct that breaches the not-for-profit requirements.
• Take specified action to remedy a breach of the obligation not to operate for profit.

Consequences of Non-Compliance Declarations

If a non-government school is declared non-compliant, often following an NFP or charity investigation, the Minister may suspend, reduce, or impose conditions on its financial assistance.

For more significant breaches, the Minister may declare that a school operates for profit. Under the Education Act, funding must not be provided to a school with a current for-profit declaration.

The Minister also has power to recover any financial assistance paid during periods when the school was operating for profit or was declared non-compliant.

The Process for Reviewing Advisory Committee Recommendations

When the Advisory Committee makes a recommendation, the proprietor is notified in writing of both the investigation outcome and the proposed recommendation. The proprietor then has 28 days to request an internal review.

An independent internal reviewer, who was not involved in the original decision, reassesses the matter. Before any final declaration, NESA issues a written notice, and the proprietor has 30 days to seek an external review in the NSW Civil and Administrative Tribunal.

Establishment of Strong Governance for NSW Non-Government School NFP Compliance

The Responsibilities of Proprietors & Governing Bodies

The proprietor and governing body of a non-government school hold the primary responsibility for ensuring compliance, a key component of NFP and charity governance, with not-for-profit requirements.

This critical duty involves several key actions, including:

• Maintaining transparent financial practices.
• Implementing good governance to ensure all school assets and income are used exclusively for the school’s operation.

Consequently, every member of a school’s governing body must understand their role in upholding these obligations.

Preservation of Comprehensive Records to Demonstrate Compliance

A key aspect of good governance is the maintenance of thorough records, which is essential for making ACNC AIS and financial reporting easy and accurate. These documents are essential for a non-government school to demonstrate compliance with not-for-profit requirements, particularly during a NESA audit.

To support transparency and accountability, a non-government school should keep detailed records, including:

• Property Valuations: Independent market valuations for any real property transactions to confirm payments are at reasonable market value.
• Procurement Documents: Records of procurement processes, such as tender documentation, multiple quotes for significant purchases, and contracts with service providers.
• Conflict of Interest Management: Documentary evidence of managing conflicts of interest, particularly with related parties, to show they have been appropriately identified and managed.
• Asset Registers: A comprehensive register of school assets that lists details of all items above a nominated value, including purchase dates, cost, and disposal information.
• Governing Body Minutes: Approved minutes and reports from the governing body that provide a clear rationale for financial decisions related to the operation of the school.

Conclusion

A NSW non-government school must navigate complex not-for-profit requirements under the Education Act, covering financial management, permitted activities, and preparation for a NESA audit. Establishing strong governance and maintaining detailed records are fundamental for a non-government school to demonstrate compliance and secure its ongoing eligibility for school funding.

For tailored guidance on navigating these complex obligations, contact LawBridge’s experienced not-for-profit lawyers today. Our Legal Team offers practical legal advice to help NSW non-government schools maintain compliance with all not-for-profit rules and confidently manage the audit process.

Frequently Asked Questions