Australia's biggest Islamic school will lose $19million in government funding for funnelling millions to the Australian Federation of Islamic Councils.

The Administrative Appeals Tribunal on Thursday upheld the Federal Government's decision last February to strip Malek Fahd Islamic school of the money.

It ruled the school at Greenacre, in southwest Sydney, was 'at minimum' run for profit and was not a fit and proper organisation.

Malek Fahd Islamic school will lose $19 million in government funding for funnelling millions to the Australian Federation of Islamic Councils

The tribunal found that though improvements were made to how the school was run, there was an 'ongoing burden of the uncommercial arrangements with AFIC'.

Malek Fahd is 80 per cent government funded and may now be forced to close, putting hundreds of teachers and staff out of work and displacing 2,400 students.

'Malek Fahd cannot survive without public funding. We only have sufficient funds to continue to the end of the second term at the end of June,' the school told parents last year.

The Administrative Appeals Tribunal on Thursday upheld the Federal Government's decision last February to strip the Sydney school of the cash

Education Minister Simon Birmingham said every taxpayer dollar should be spent on education

Federal Education Minister Simon Birmingham welcomed the ruling, saying it ended 18 months of uncertainty.

'Australians rightly expect that every taxpayer dollar committed to school education is genuinely expended on school education,' he said.

'Our attention now turns to working with the students and their families, the teachers and the whole school community about how we best support them through this difficult time.

'While this is a difficult time, I remain committed to ensuring that all school authorities meet the requirements of the Education Act to ensure that our taxpayer dollars and any private investment by parents is being spent to benefit Australian students.'

The tribunal found that though improvements were made to how the school was run, there was an 'ongoing burden of the uncommercial arrangements with AFIC'

Malek Fahd is 80 per cent government funded and may now be forced to close, putting hundreds of teachers and staff out of work and displacing 2,400 students (stock picture)

The funding was pulled after a review of six schools authorities affiliated with the AFIC after concerns were raised about their financial management and governance.

It found Malek Fahd gave the AFIC millions of dollars in management fees and consistently failed to comply with basic financial and governance standards.

The other schools audited were the Islamic College of Brisbane, the Islamic College of Melbourne, the Islamic College of South Australia, the Islamic School of Canberra and Langford Islamic College, in Western Australia.

The funding was pulled after a review of six schools authorities affiliated with the AFIC after concerns were raised about their financial management and governance

The Department of Education and Training said the Act requires all school authorities operating on a not-for-profit basis, to be 'fit and proper' and 'ensure that funding provided is used only for school education'.

With fears the school could close before students could complete their HSC this year, teachers started planning to set up classrooms in their living rooms and garages, according to the Sydney Morning Herald.

'It gave them comfort that the doors were always going to be open for them, whether it's our school doors or garage doors or our house doors. It brought out the best in us,' the school's curriculum co-ordinator Tulin Bragg said last month.

In the end, students scored of 90 or above in 18 per cent of their exams this year.