Part B2: Not for profit requirements – Reasonable market value
A school will operate for profit if it makes a payment for property, goods or services that is at more than reasonable market value (Section 83C(2)(b)(i) of the Education Act).
Reasonable market value means the price that a knowledgeable and willing third-party would likely pay for property, goods or services in an arm’s length transaction (a transaction between two independent parties who are both seeking the best deal for themselves) from the seller.
Factors and records that are relevant in determining whether a payment is at reasonable market value will differ depending on the nature of the transaction (and further guidance is provided below). Transactions should be supported with appropriate documentation.
B2.1 Real property for school use and reasonable market value
Reasonable market value for real property can be influenced by a range of factors. Schools may acquire property through the means that is most beneficial to the school, including (but not limited to) private purchase on the open market, bidding at auction or through direct negotiation with the seller.
In determining reasonable market value, it is strongly recommended that schools undertake independent expert market valuation. Factors may influence a price above an independent market valuation. This will not necessarily mean that the payment is above reasonable market value, but such a transaction must be supported by clear documentation on the factors and reasoning that informed the school’s assessment of the value of the property for the school.
It is crucial that particular care be taken when purchasing property from a related party. Transactions that are not made at ‘arm’s length’ pose a much higher risk of for profit activity. Any purchases of property that involve related parties must be carefully considered and be transparently and comprehensively documented.
- Market valuation undertaken by an independent qualified valuer at the time of the property transaction, supported by detailed written valuation instructions.
- Documentary evidence that conflicts of interest and relationships with related parties (if any) have been appropriately identified and managed.
- Records (including decisions and rationale) that clearly explain how the school has determined that the relevant transaction is at no more than reasonable market value.
Note: This list is only a guide. It is not intended to be exhaustive or prescriptive. For further detail read our section on Records to demonstrate compliance.
B2.2 Goods or services for the school and reasonable market value
When making a payment for goods or services, reasonable market value can be influenced by a range of factors including:
- the quality, safety and consistency of provision of the goods or services
- the location of the school
- if the goods or services are required at short notice or must be obtained/completed within a specific timeframe (for example, outside of normal business hours)
- if the goods or services are in short supply
- heritage or related matters (in relation to building and related works)
- the types of warranties provided (if any)
- local government requirements
- installation costs and any ongoing maintenance and parts.
Generally speaking, the higher the value of the goods or service being purchased or the more significant the transaction, the more careful the school should be. This means keeping more detailed records and following a more rigorous procurement process.
As with property purchases, any purchases for goods or services with related parties can carry a greater risk of for profit activity and should be carefully considered and transparently documented to ensure payments are not above reasonable market value.
- Contracts between the proprietor/school and the service provider, clearly setting out the goods and/or services to be provided.
- Tender documentation.
- Documented evaluation criteria used to assess reasonable market value.
- Documented compliance with procurement thresholds and policies (e.g. multiple quotes or tender process for higher-value items or long-term contracts).
- Establishing a list of preferred suppliers through market testing
- Documentary evidence that conflicts of interest and relationships with related parties (if any) have been appropriately identified and managed.
- Related industrial awards and/or enterprise agreements.
Note: This list is only a guide. It is not intended to be exhaustive or prescriptive. For further detail read our section on Records to demonstrate compliance.
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