When are arrangements with related charitable entities ok and when are they not?

The amended Education (Accreditation of Non-State Schools) Act 2001(Qld), has been passed by the Queensland Parliament and received Royal Assent on 25 August 2017.

A number of the amendments seemed to be in response to: Malek Fahd Islamic School Limited and Minister for Education and Training [2016] AATA 1087 (23 December 2016). See: http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/AATA/2016/300.html?context=1;query=Malek Fahd Islamic School Limited and Minister for Education and Training

Some extracts from the judgement:

At para 42 – 44:

… there is little doubt that MFISL [school] was making distributions to AFIC [parent religious body] over a long period. …. Those distributions were indirect, in that they were provided to AFIC in the form of inflated rents that were paid in advance and in respect of services allegedly provided by AFIC. The expenditures that improved the value of AFIC properties also amounted to an indirect distribution of MFISL funds; the payments in respect of services supposedly provided by AFIC can be characterised in the same way.

It also seems likely that MFISL funds were applied otherwise than for the purposes of the school, and not in connection with the function of the approved authority. While schools commonly pay rent on properties they use for educational purposes, the payment of inflated rents or advance payments without any proper basis is not acceptable. Advancing uncommercial loans to a parent entity is also impermissible. The funds expended in these transactions were not applied for MFISL. They were applied for the benefit of AFIC, or someone else.

In all the circumstances, I am satisfied MFISL was conducting a school ‘for profit’ within the meaning of that expression in s 75(3). The fact profits were being distributed to or applied for the benefit of AFIC weighs heavily in favour of that conclusion. The acknowledged shortcomings in the financial policies and practices that were evident at the time also point to that conclusion.

The Parliamentary Committee report into the Bill that proposed the amended Act is instructive.

The following extract from the Department is worth noting in respect of arrangements between a School and an associated charitable entity (for example a religious body).

The department advised that arrangements with other not-for-profit entities such as parent associations and religious organisations that provide a benefit for the school would not be captured by the proposed definition of prohibited arrangement. (Point 2.5)

Governors of a school have always had a duty to act in the best interests of the school. Connections (direct or indirect) between governing bodies between the school and another entity that could reasonably be excepted to compromise independence of the school governors when making financial decisions will lead to a failure to meet government funding eligibility criteria (s10 of the Act). (This requirement was in essentially in the previous Act but in a different manner for example section 93). Importantly this based on an objective test of “reasonably be expected.” The mere fact that there is a connection would in our view never be enough. The key is that school governors must act as governors of the school in the best interests of the school (and not at the behest or under the direction of another related charity, for example a church).

Keys for relationship a School / College and related charitable entities (going forward), which are really not new:

  1. Lease / Licence rent and charges by related entities must be reasonable and commercial (supported by evidence)
  2. The length of tenure must be reasonable and commercial (at least the useful life of buildings so not capital improving land belonging to someone else)
  3. Loan Agreements to related entities should be on reasonable commercial terms
  4. Management / Services charges by related entities must be on reasonable commercial terms
  5. There should be written Board policies & practices about the above matters, consistently applied in accordance with their terms
  6. Gifts to related entities should be minor and incidental (ideally from trading activities), including gifts to start a new school that is not a campus of an existing school and then only for the purpose for advancing the school’s philosophy (s7 of the Act)
  7. Conservatively trading activities should have some intrinsic connection with (in aid of / part of) operating a school
  8. Conservatively trading activities that do not have intrinsic connection with operating a school should be housed in a separate legal entity (not receiving government funding)
  9. Governors of the College make decisions in the best interests of the College not subject to direction from another entity.

Andrew Lind (Director) is Deputy Chair of the Queensland Law Society Not-for-profit and Charity Law Committee and a member of the Law Council of Australia Charity & Not-for-Profit Law Committee. In these roles he is regularly involved in making submission on proposed not-for-profit law reform.