Education Minister Adrian Piccoli wrote to the Malek Fahd Islamic School (pictured) in Greenacre yesterday advising the funds must be repaid.
A spokesman for Mr Piccoli says the order follows a Federal Government audit, requested after concerns about the financial arrangements between the school and the Australian Federation of Islamic Councils.
The spokesman says the school has been operating against not-for-profit guidelines since 2010.
Federal Education Minister Peter Garrett says he also received a letter from Mr Piccoli yesterday, and that documents will be referred to the NSW Police Force and the Australian Securities and Investments Commission.
Mr Garrett says the school has not breached federal guidelines, but there are concerns about some governance issues.
“I’ve asked them to write to me on those matters. They have written to me, I’m now taking advice from the department,” Mr Garrett said.
The school’s principal, Intaj Ali, has been unavailable for comment.
The school, which opened in 1989, has about 2,000 boys and girls enrolled across its primary and high school classes.