The Private School Funding Model is Deeply Flawed: A New Approach is Needed

The following is a summary of a new SOS Education Policy Brief. The full Brief can be downloaded below. This article and the Brief were revised on 2 October 2020.

Six months ago, the Morrison Government changed the method used to determine Commonwealth funding of private schools. It adopted a direct measure of the income of families called Adjusted Taxable Income (ATI) to assess their capacity to contribute to school income and thereby determine the level of Commonwealth funding for each private school. It will provide a net funding increase of $3.5 billion to private schools over the next ten years compared to the previous method of funding.

ATI is a deeply flawed measure of the financial need of schools. It will result in massive over-funding of private schools because it badly under-estimates the capacity to contribute of families and ignores other sources of income of private schools as well as their assets. As a result, the financial need of schools is over-estimated and consequently they receive more government funding than warranted.

ATI under-estimates the capacity to contribute of families who receive income from grandparents to pay all or part of school fees and make other purchases, receive non-taxed income from capital gains, or have non-disclosed income in Australia or in overseas bank accounts and tax havens.

A fundamental flaw in the funding model based on ATI is that it assumes that the parents of children pay the school fees. There is widespread evidence that many grandparents pay at least part of the fees. Surveys show that almost one-third of grandparents draw down on their superannuation to pay school fees for grandchildren and about 60% of private school students have their fees at least partly paid by their grandparents.

In addition, grandparents financially support their children in a myriad of ways such as deposits on houses, house renovations, household assets, cars, holidays, etc. Income provided for these purposes frees up family income to be used to pay school fees. All this income increases the capacity to contribute of families but because it is non-taxable gift income it is not included in ATI.

ATI also under-estimates the total disposable income of families who receive a capital gain because only 50% of the gain is recorded as taxable income. The capital gains tax discount is worth over $10 billion a year and over 80% of this goes to the top 20% of income earners. Many high income families with children in private schools are likely to be recipients of this non-taxed income.

ATI also does not include non-disclosed income in Australia or held in overseas bank accounts and tax havens. The use of overseas bank accounts and tax havens to hide income are mainly used by high income earners and is likely to be significant in under-estimating the capacity to pay in elite private schools.

The ATI also ignores the wealth of families which is a significant factor in capacity to contribute. Assets such as shares, securities and other investments are just as much part of capacity to contribute as direct income. The assets of schools are also ignored in assessing their financial need.

Determining Commonwealth funding of private schools by a measure of the capacity of families to contribute income ignores the income of schools from other sources. Private donations are a significant source of income for private schools, especially high fee schools who receive millions in donations including from overseas foundations.

Apart from its fundamental flaws, the new method of funding private schools was the ex post result of a special peace deal negotiated between the new Morrison Government and the Catholic Church in 2018. The increase in funding was negotiated nearly 18 months before ATI was announced as the measure of the direct income of families to be used to assess capacity to contribute. The funding method was fitted post hoc to the negotiated funding increase.

Several other methods can be considered to determine the capacity to contribute of families in private schools. However, they are all inherently flawed. They fail to adequately measure the capacity to contribute of families because several sources of family and school income are ignored as well as family and school wealth. The insuperable problems associated with accurately assessing capacity to contribute demonstrate that a new approach to funding of private schools is needed.

A new approach should abandon the whole idea of working out the capacity to contribute of families as a basis of government funding of private schools. Instead, the basic principle behind government funding of private schools should be that no school operates with less total resources than a community standard necessary to provide an adequate education for all students. Governments have the responsibility to ensure that children should not be deprived of an adequate education because their parents enrol them in under-resourced schools.

Government funding for private schools should fill the gap between the income from fees and other sources of income and the community standard. Schools with private income above the community standard are not entitled to baseline government funding because it extends their resource advantage over public schools.

Under this model, government recurrent funding for private schools would incorporate three features:

• A baseline component that varies between schools to take account of the funding obtained from private sources such as fees and donations;
• A discount factor applied to the baseline funding which varies according to the extent to which private schools meet the same social obligations of public schools; and
• Funding loadings for disadvantaged students and locations

This model would provide a genuine needs-based funding model that eliminates the vast over-funding of private schools under the current approach.