Productivity commission exposes private school funding defects

Education, Government, Politics

Productivity commission exposes private school funding defects

Jul 31, 2024

Girl student, backpack and walking in a school ready for study.

New analysis by the Productivity Commission of donations to school building and other funds highlights how antithetical private school funding is to the concept of needs-based funding.

A new report by the Productivity Commission on Philanthropy has highlighted defects in the funding of private schools. The report shows that private schools receive millions of dollars in donations to school building funds that are heavily concentrated in highly privileged schools. It says these donations are not based on need and are not considered in determining the financial need of these schools for government funding. Schools in receipt of millions in donations serve the richest families in Australia who get a double benefit – lower taxable income because donations to school building funds are tax deductible and lower school fees as a result of the donations.

Private school building funds and other funds supported by donations have Deductible Gift Recipient (DGR) status which allows donations to be deductible from the donor’s income tax. As such, it is an indirect government subsidy to private schools. The Productivity Commission estimates the tax deduction costs about $100 million a year.

The Commission examined the total donations to school building funds only and also to multiple funds covering donations for school buildings, scholarships and library funds as well as funds operated by private school systems. It estimated that donations to school building funds only amounted to $69.4 million in 2020-21 across 719 schools. Donations to multiple funds amounted to $160.6 million across 736 schools. In total, donations to school building funds in 2020-21 and other funds amounted to $230 million across 1,455 schools.

The donations are heavily concentrated in relatively few schools. For example, seven schools out of 719 schools, or 1% of schools with tax deductible school building funds received $24.6 million in donations in 2020-21 which is 35% of all donations to building funds. Just 72 schools (10% of schools with such funds) received $58 million, representing 84% of all donations to building funds (see table). In regard to schools with multiple funds, 74 schools out of 736 (10%) with such funds received $133 million in tax deductible donations which is 71% of all donations to such funds.

Aggregate donations to the two categories of funds are obviously highly concentrated. Fifteen schools (or 2% of all schools with tax deductible funds) received $56.2 million and accounted for 24% of all donations and 146 schools (10% of the total with tax deductible funds) received $171.9 million which is 75% of all such donations to private schools.

The Commission observed that donations to school building funds depend on the income and wealth of the school community:

…the capacity of schools to raise donations varies widely, depending on the wealth and income of the school community, which form the main pool of potential donors. [p. 191]

Inspection of financial statements lodged with the Australian Charities and Not-for-profits Commission shows that the schools receiving large donations are generally high fee schools whose families have high incomes. For example, in NSW in 2021 Loreto Kirribilli received $10.5 million, Moriah College $7.9 million, Cranbrook $5.2 million, The Scots College $4 million and Shore $2.8 million. In Victoria, Wesley College raised $5.6 million, Melbourne Grammar $4.8 million, Caulfield Grammar $3.9 million, Scotch College $2.3 million and Loreto Mandeville Hall $2.3 million. In Queensland, Anglican Church Grammar raised $3.3 million and Brisbane Grammar $2 million.

These schools all serve very high income families. According to figures provided to Senate Estimates by the Commonwealth Department of Education, the median taxable income of families with students at Loreto Kirribilli is $418,000, the 6th highest of any school in Australia. Shore has a median family income of $409,000 and Cranbrook $402,000, the 7th and 8th highest respectively. The family income at The Scots College is $336,000 and $317,000 at Moriah College. The figures for the above Victorian schools are Wesley College $271,000, Melbourne Grammar $336,000, Caulfield Grammar $257,000 and Scotch College $326,000 and Loreto Mandeville Hall $335,000. The family income for Anglican Church Grammar is $295,000 and $323,000 for Brisbane Grammar. Nearly all these incomes are three or four times that of the median family income in Australia.

Donations to Private School Building Funds, 2020-2021

Notes:

The Commission’s report provides figures for School Building Funds Only and for Multiple Funds. The totals for all funds are calculated from those figures.
The Commission’s report provides figures on the total number of schools in each type of fund but does not provide the number of schools in each percentage category. The latter figures are calculated from the figures provided in the report. As a result, the figures for average donations per school and the share of donations for each percentage category are slightly different from those in the report because of aggregation.

Access to tax deductibility for donations to schools is thus highly inequitable because it depends on the wealth and income of those likely to donate. As one researcher said:

You would be hard-pressed to think of a more regressive but grimly effective method to widen infrastructural disparities, which are now bordering on obscene.

This is one reason why the Commission recommended ending DGR status for school building funds.

A key reason that DGR status for school building funds is not the most effective or efficient way to allocate government funding is that DGR status for school building funds is unlikely to deliver support to the areas of greatest need in a way that aligns with the broader equity-based objectives and priorities of the education funding system.
… many schools servicing communities with greater socio-economic disadvantage are less likely to benefit from DGR endorsement for school building funds, because their
potential pool of donors has less capacity to contribute voluntary donations. [p. 193]

Another reason the Commission recommended ending DGR status for school building funds is that they do not deliver a net community benefit which is required to gain charitable status. Instead, they provide a private benefit in the form of lower fees. The Commission noted that receipt of donations directly affects the level of school fees. More donations mean lower school fees. The beneficiaries are parents and students at the school, not the wider community while the donors claim a tax deduction. Where the donors are the fee payers there is a direct private benefit.

The solicitation for donations from the people who are also charged fees is strongly indicative that the main beneficiaries from an organisation’s service are likely to be the individual recipients of the service and that any broader community-wide benefits are likely to be incidental. [p. 197]

There is little doubt that substitution between donations and fees in the revenue mix used to meet school costs, including for infrastructure, does occur, given the inherent fungibility of revenue sources. [p. 198]

Moreover, the benefits of the facilities funded by donations accrue exclusively to the children of families who can afford to pay the fees. These facilities are not freely accessible by the broader community. Indeed, many high fee private schools earn additional income by hiring their facilities.

DGR status for school building funds is another form of government subsidy that reduces fees. In this case, it is wealthy schools that get the biggest subsidy in contradiction of the Gonski model whereby schools with lower median family incomes get more funding than high income schools. It is a subsidy for the rich. The Commission clearly sees DGR status for school building funds as incompatible with the needs-based approach to school funding:

DGR status for school building funds is unlikely to allocate support to areas of greatest need. [p. 193]

More broadly, the Commission’s analysis of the extent and pattern of donations to private schools exposes a major defect in the method of funding private schools. The system is defective because the hundreds of millions of donations raised by private schools, particularly by those serving the richest families, is not considered in assessing the financial need of schools for taxpayer funding.

The current method of recurrent funding of private schools, called the Direct Measure of Income (DMI) method, introduced by the Morrison Government uses taxable income of families to measure their capacity to contribute (CTC) to pay school fees. The CTC score determines the base level of government funding of a private school. The failure to consider millions in of dollars in donations to schools means that the financial need of schools is over-estimated and results in over-funding of private schools by the taxpayer. The high concentration of donations in relatively few, mostly wealthy private schools revealed by the Productivity Commission indicates that these schools are massively over-funded.

While the terms of reference for the Commission’s inquiry did not extend to the method of funding private schools, it is interesting that the Commission felt compelled to comment:

An important observation about the CTC model is that government funding for non-government schools is not affected by the actual level of funds schools receive through fees, donations and/or other private contributions. [p. 190]

It is extraordinary that a school funding system, supposedly dedicated to needs-based funding, continues to ignore millions in donations to wealthy private schools in determining their government funding. It is also extraordinary that it ignores other lucrative sources of income such as financial investments, property rental, hire of facilities and other commercial activities. Indeed, it is extraordinary that these schools with school fees of $30,000-$40,000 or more and family incomes of $300,000 and more get any government funding at all.

The Commission’s analysis of donations to school building and other funds highlights how antithetical private school funding is to the concept of needs-based funding. It makes a mockery of needs-based funding especially when public schools remain massively under-funded and are likely to remain so under the new funding agreements being negotiated between the Commonwealth and the states. It highlights the contradictions and unfairness of school funding in Australia – more privileges for the rich while the poor go begging.

The Albanese Government had the chance to reduce the injustice of school funding courtesy of a strong recommendation by the Productivity Commission backed up by its rigorous analysis. But, true to form, it has squibbed challenging the privileges of the rich and powerful. It immediately capitulated to the wealthy private school lobby. The Minister for Charities , Andrew Leigh, quickly ruled out any changes to the tax settings for donations to school building funds. In the same breath, he said that “a world-class education system is essential to tackling inequality”. It is utterly incomprehensible how retaining tax deductions that mostly benefit the wealthy and their lavishly resourced schools achieves this. As one academic commented: