Non-government schools in NSW will be required to hand over financial information to education authorities seeking to ensure they are spending public money appropriately, under a tightening of the rules by which more than $1 billion is granted to them each year.
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Independent schools that receive funding from the state government will also be banned from paying directors, while a new advisory committee will be established to oversee the regime and advise NSW education minister Adrian Piccoli.
The changes, in legislation to be introduced to Parliament by Mr Piccoli on Wednesday, follow revelations about the use of state government funds by Australia's largest muslim school, Malek Fahd.
The Greenacre-based Islamic school was found by education authorities to be operating for profit between 2010-12.
Mr Piccoli subsequently ordered Malek Fahd to repay $8.5 million in NSW government funds - a decision being appealed in the Supreme Court.
Since 2006, independent schools who receive state government funding must operate on a not-for-profit basis. For-profit schools can operate in NSW but are ineligible for public funding.
Under changes to the Education Act, a "not-for-profit advisory committee" will be established with representatives of independent schools, while a stricter definition of "for profit" will be applied.
The act will stipulate that all purchases and payments must be at reasonable market rates and necessary to run the school.
While Mr Piccoli may currently declare a school is "for-profit" and end public funding, the new legislation gives him "graduated" powers.
This will allow him a broader range of responses to findings of non-compliance with the act, including reducing funding or imposition of funding conditions.
He will also be empowered to direct non-government schools to submit to an audit and provide information as part of the process or risk losing funding.
"Almost all non-government schools are doing the right thing," Mr Piccoli said.
"These amendments are designed to ensure that all people operating non-government schools know exactly what is expected of them and are held accountable for their actions".
The changes are not retrospective and will come into force three months after assent. They have been welcomed by the Catholic Education Commission of NSW and the Association of Independent Schools of NSW.
