Australia's largest Islamic school's future hangs in the balance after a full bench of the Federal Court dismissed an appeal against its $19 million federal education funding cut.

Malek Fahd Islamic school in Sydney's west had its funding cut two years ago by Federal Education Minister Simon Birmingham over poor governance issues and because it was operating for profit.

The school of 2,500 kindergarten to Year 12 students, which has its largest campus in Greenacre, had been able to keep going due to interim appeals in lower courts, internal reforms including a change of board and an overhaul of its relationship with its landlord, the Australian Federation of Islamic Councils.

The Federal Court on Tuesday upheld an earlier judgement by the NSW Administrative Appeals Tribunal.

In applying to appeal the matter, the school argued "things had changed under its new management" and the school was no longer operated for profit, the judgement said.

"The [Education] Minister accepted that some things had changed as a result of the change in [Malek Fahd's] management, but maintained that the school continued to be operated for profit," the judgement said.

'All schools must comply': Minister

In a written statement issued on Tuesday, Mr Birmingham said all schools must comply with the Education Act.

Dr John Bennett, chair of Malek Fahd school board, with lawyer Rick Mitry after Tuesday's decision. ( ABC News: Danuta Kozaki )

"All school authorities must meet the requirements of the Education Act and ensure that our taxpayer dollars and any private investment by parents is being spent to benefit Australian students," he said.

The school's board chair John Bennett said he was extremely disappointed in the decision.

"It was a split decision by the full bench of the Federal Court. We now need to look at the decision and look at our options," he said.

"We will look at appealing the High Court.

"If that appeal fails we will not be able to afford to stay open," Dr Bennett said.

School to stay open for now

The school would continue operating during any appeal process, the chair explained.

"We are telling the parents and students that we are doing all we can — this is not the same school as two years ago," Mr Bennett said.

"I am fully supportive of the money provided by the Government being spent properly.

"But looking briefly at today's orders, we believe things have changed since last May's federal court hearing."

Dr Bennett said he would also look at appealing directly to the Education Minister.

Senator Birmingham said he had contacted NSW Education Minister Rob Stokes to "work together to support the school's students, families and staff".