The Islamic School of Canberra has been stripped of its federal government funding after it failed to meet the education department's demands that it improve its governance and financial management.
The independent school was receiving around $1 million in public money every year.
Education Minister Simon Birmingham's office released a statement saying the department had "no choice" but to cut off funding from July 1.
The department put the school on notice in December 2015, warning that the school was failing to meet standards and community expectations.
The school lost its funding in April last year, but had it reinstated in September after it promised to make improvements.
“Schools receive significant taxpayer funding. Australians rightly expect that every taxpayer dollar committed to school education is genuinely expended on school education and for the benefit of students," Mr Birmingham said in his media release.
“My Department’s concerns centre on the Islamic School of Canberra’s independence, financial management and governance arrangements."
SBS News contacted the school for comment, but was advised both the principal, David Johns, and the chairwoman, Azra Khan, could not speak "at the moment" as they were busy preparing the school's public response.
Students are due to return from school holidays next week.
"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," Mr Birmingham said.
The school is still registered by the ACT Government and can continue to teach, but it is unclear whether the school could be financially viable without Commonwealth support.
The school has 30 days to seek a review of the decision, Mr Birmingham's office said.