Australia's largest Islamic school was used as a 'milking cow that never runs dry' for a powerful Muslim group behind halal certification, a court heard.

The Malek Fahd Islamic School at Greenacre, in south-west Sydney, last year lost $19 million in annual federal funding, following revelations taxpayer money was leaking to the Australian Federation of Islamic Councils.

This group, also known as AFIC, charges major food producers, including Kraft Vegemite, fees for halal certification.

These fees, to certify the product contains no pork or alcohol products, are used to fund Islamic schools.

The Federal Court was told there was a 'toxic combination of directors' on the boards of both the school and AFIC, The Australian reported.

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The Malek Fahd Islamic School's directors were also on the board of the Australian Federation of Islamic Councils

The Malek Fahd Islamic School at Greenacre (pictured) is appealing a decision to strip it of $20 million in annual federal funding

The school leases land from the Australian Federation of Islamic Councils, which also charges halal certification fees to the likes of Kraft Vegemite (pictured)

The Greenacre school, which leases land from AFIC, has gone to the Federal Court to appeal a ruling by the Administrative Appeals Tribunal last year which upheld Education Minister Simon Birmingham's decision to withhold $19 million in annual taxpayer funding.

The Muslim school has appealed to the Federal Court to have the minister's decision overturned.

The legal counsel for the school, Ian Coleman SC, told the court some directors of the school had also been on the board of AFIC, The Australian said.

He described it as 'a toxic combination of directors'.

The school has three campuses, including Greenacre which was leased from AFIC and allegedly used to fund the Muslim umbrella group, the newspaper report said.

The Malek Fahd Islamic School at Greenacre was paying inflated rent to the Australian Federation of Islamic Councils

Education Minister Simon Birmingham last year stripped $19 million in federal funds from the Malek Fahd School in Sydney

'The Greenacre lease was treated by AFIC as a milking cow that never runs dry,' Mr Coleman said, adding the school would be put into liquidation if the federal funds did not flow again.

The court also heard the Greenacre school had debts to AFIC.

Last year, the Administrative Appeals Tribunal found the school's board, which has AFIC ties, was not spending its taxpayer funding on educating its 2400 students.

It found AFIC had a 25-year arrangement with the Malek Fahd Islamic School to lease the property for its Greenacre campus from AFIC at the substantially inflated rate of $1.5 million a year.

Hizb ut-Tahrir spokesman Uthman Badar was educated the Malek Fahd Islamic School

Senator Birmingham's legal counsel Richard Lancaster SC argued to the Federal Court on Wednesday the school was bound to honour its financial contracts with AFIC.

The Malek Fahd school's graduates include the leaders of Islamist extremist group Hizb ut-Tahrir Australia, Uthman Badar and Hamzah Qureshi.

Daily Mail Australia in March captured Mr Badar on camera telling a forum at Bankstown library that ex-Muslims deserved death.

Prominent Islam critic Ayaan Hirsi Ali and Adelaide-based Shia imam Sheikh Mohammad Tawhidi have both called for Australia to shut down Islamic schools claiming they are radicalising students.

The Malek Fahd school has three Sydney campuses in Greenacre, Hoxton Park and Beaumont Hills.