In a recent Tribunal decision, Deputy President McCabe has affirmed the decision of the Minister for Education and Training (Minister) to revoke the approval of Malek Fahd Islamic School Limited (MFISL) as an approved authority under the Australian Education Act 2013 (Cth) (Education Act). Primarily, it was held that MFISL no longer met the requirements of operating on a not-for-profit basis under the Education Act.

Malek Fahd Islamic School Limited and Minister for Education and Training [2016] AATA 1087

The Tribunal held that transactions involving MFISL and an associated organisation, the Australian Federation of Islamic Councils (AFIC), constituted conducting a school ‘for profit’ within the meaning of the Education Act. It was deemed that MIFSL had failed to put in place adequate policies and practices to ensure that spending was only for the purposes of providing school education.

Due to the relationship between the organisations, the Tribunal was critical of advanced payments of inflated rent to AFIC as well as payments to AFIC for ‘non-existent’ services. The Tribunal ultimately concluded that the transactions between MFSIL and AFIC had occurred only for the financial benefit of AFIC and had no connection with the functioning of the school.

In handing down its decision, the Tribunal reiterated the importance of (and the care that must be taken) when charities have dealings with any associated entities.

The Tribunal’s approach to the ‘not-for-profit requirement’ for education bodies is consistent with the approach adopted in the Australian Charities and Not-for-profits Commission Act 2012 (Cth) (Act). Under the Act, an organisation must ensure that any benefits (whether direct or indirect) are provided in a way that is genuinely for its charitable purpose, and is not distributed to its members.

Issue

In recent months we have seen a number of prominent charities unable to demonstrate that their profits are being used for the attainment of their charitable purposes, an example being Camp Gallipoli Foundation Incorporated. The similar treatment of the ‘not-for-profit requirement’ across both the education and charity contexts highlights the importance of ensuring clarity and transparency in the management of a not-for-profit organisation and their use of funding.

Organisations should have particular regard to clearly articulating how the use of funds is consistent with their charitable purposes (or at least ancillary to their charitable purposes) in addition to creating or maintaining sound financial reporting practices to demonstrate that the purpose is being fulfilled.

Relationships between charities and associated entities where funds flow from one to the other always pose substantial risk for the charities involved. Charities must take care and put in place effective measures to ensure that any such arrangements are appropriately documented and enforced. If not, it may only be a matter of time before the ACNC comes knocking.