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

On 23 December 2016 the Deputy President of the Administrative Appeals Tribunal, Bernard J McCabe, handed down his much anticipated decision in the case of Malek Fahd Islamic School Limited and Minister for Education and Training.  

In the case, which received a great deal of media attention, the Tribunal reviewed the decision by the delegate of the Minister for Education and Trading to revoke Malek Fahd Islamic School Limited’s (“the School”) approval under the Education Act 2013 (Cth) (“the Act”).  Importantly, being an “approved authority” under the Act entitles a school to receive Commonwealth funding.

The Tribunal decided to let the delegate’s decision stand, making it clear, however, that all the evidence suggests that the School “provides quality education… appears to enjoy support in the community, [and] has the loyalty of its students and staff” and “that the reviewable decision is not directly concerned with the quality of the education provided by the school”.

The take away

The Tribunal noted that it is common, and generally acceptable, for “schools… [to] pay rent on properties they use for educational purposes”.  However, what the Tribunal did find unacceptable, or impressible under the Act, was that the funding provided by the Commonwealth was not applied to the School but was instead used for the “payment of inflated rents”, “advance payments without any proper basis” and [a]dvancing uncommercial loans to a parent entity”.

As the case reflects, when the tenant and School are related parties, it is safer to err on the side of caution.  Rent paid by a School should be on the basis of land value only, and should be more in the vein of a ‘gesture’, or acknowledgement, that while the School may own the school buildings, it does not own the land.

At the present time, with the new school year having commenced, the implementation of the Minister’s decision has been delayed pending the College’s appeal of the decision to the Full Bench of the Federal Court.

Facts

  1. Greenacre property

The School leased the Greenacre property, on which the School campus was located, from the Australian Federation of Islamic Councils (“the Council”), in 1990.  Under the terms of the  lease, the School made approximately $100 million worth of improvements to the property.  The School also “alleges it paid rent in excess of the agreed amount under” this lease.

In 2008 the School agreed to increase the rent to $1.3 million per year, in essence to enable the Council to purchase a property in Hoxton Park.

A new lease was entered into for the property in 2009 which was “expressed to be for a term of 25 years with an option for a second term of 25 years” and backdated to 1 January 2008.  A valuation undertaken estimated that the current rent payable by the School was $1.5 million per year.  The School agreed to pay this higher rent as well as to make $2.8 million worth of back payments to the Council.  The Tribunal noted that the parties agreed that “rent being paid on the Greenacre property was substantially in excess of the market rent payable during that period”.

  1. Condell Park property

The Council purchased the Condell Park property in 2000 for $7.1 million for the purpose of building another campus for the School.  A School campus was never built, and the property was eventually sold in 2003 for $10.35 million.

The School advanced the Council an unsecured interest free loan for $1.42 million, which the Council used to pay the deposit and GST on the purchase of the property.  This loan “was not properly documented and there was no time fixed for repayment”.  The School also guaranteed a separate loan for $6.39 million.

When the Council sold the Condell Park property, no sale proceeds were distributed to the School and the $1.42 million loan was not repaid to the School.

  1. Hoxton Park property

The Council purchased the Hoxton Park property in 2008.  The lease from the Council to the School for the Hoxton park property was for 25 years, with a 25 year option.  The School agreed to pay yearly rent of $500,000, five years in advance without, the Tribunal noted, “a proper valuation being presented, and without (at least initially) a formal lease.

  1. Provision of service

The Council charged the School $2.2 million for services provided between the years 1989 and 2002.  In 2011 a Service Agreement was entered into between the School and the Council, which was terminated only a year later.  The School did not receive a refund for the money it had already provided under the terminated Service Agreement.

Decision

The Tribunal concluded that the School “was not compliant with s 75 [of the Act] in the past because it was, prior to March 2016, being conducted for profit.  I have also concluded it was not a fit and proper person prior to that point, and that the organisation was not compliant with its obligations under s 78 [of the Act]. It follows the discretion in s 81 [of the Act] to revoke or vary the approval has been enlivened.”

  1. Section 75

Under s 75 of the Act, the School was required to operate on a not-for-profit basis, which the Tribunal explained meant that the School could not distribute profits to its members in the form of dividends. The Tribunal explained that the School was deemed to have made indirect distributions to the Federation “in the form of inflated rents that were paid in advance and in respect of services allegedly provided by” the Council.

  1. Fit and proper person

The Act requires all Schools to satisfy the “‘fit-and-proper person’ requirement” in which, in accordance with the Education Act Regulation 2013 (Commonwealth), the following are considered:

  • whether the person, or a key individual of the person, has experience and expertise in administering a school and providing education at a school; and
  • whether the person has governance arrangements in place, including the following:
    • arrangements for managing and supervising the provision of education at the school;
    • arrangements to ensure compliance with the laws of the Commonwealth, a State or a Territory relating to the provision of school education; and
  • whether the person has debts due to the Commonwealth in relation to the provision of school education.

In concluding that the School was not a fit and proper person, the Tribunal took into account that prior to March 2016, the School had “expended monies” to the Council “for impermissible purposes”, namely that the monies were not used for the purpose of providing education.

The Tribunal was satisfied that the internal structures and governance arrangements of the School were much improved since the resignation of board in 2016 and appointment of new members. However, the fact that the School had an “ongoing liability to make payments that are inconsistent with the requirement under the legislation”, namely ongoing payments to the Council in relation to the Greenacre lease that is still on foot, meant that the Tribunal could not be satisfied that the School “is now a fit a proper person.

  1. Section 78

Section 78 of the Act outlines the ongoing funding requirements for a school, with which the Tribunal found the School, prior to 2015, had not complied “because funds provided by the Commonwealth were not made available to meet the needs of students.”

Josephine Heesh, Partner
Merryn Lynch, Solicitor

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