Six Islamic schools face losing Commonwealth funding unless they improve their compliance with federal education requirements.
Federal education minister Simon Birmingham said an audit of the schools had identified concerns over their governance, financial and accountability arrangements.
"This action does not come lightly. All schools must have effective management and accountability arrangements in place to support the best possible education outcomes for their students," he said in a statement.
The schools, all affiliated with the Australian Federation of Islamic Councils are the Islamic College of Brisbane, Islamic College of Melbourne, Islamic College of South Australia, Islamic School of Canberra, Langford Islamic College (WA) and Malek Fahd Islamic School (NSW).
They reportedly receive up to $45 million a year from state and federal governments.
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The audit was launched in June after mounting complaints of financial mismanagement and fundamentalist practices in the schools.
Senator Birmingham said operators of the six schools had been issued with notices for failing to comply with financial management and governance requirements of the Australian Education Act.
He said this legislation required all school authorities to operate not-for-profit, be a fit and proper person and ensure that funding provided was used only for school education.
"My focus is always that we, as the taxpayer, get maximum bang for our buck to improve education outcomes for Australian children," he said.
"School governance should be of the highest standard and funding should be used for the benefits of students."
Senator Birmingham said a formal process was now in place and school authorities have 28 days to respond and demonstrate how they will comply.
Penalties for non-compliance could include removal of Commonwealth funding for the six schools.
