However, the Government says it will have to keep the system until 2012 before it introduces any changes.
The Sydney Morning Herald reports a secret Department of Education document, says the system "entrenches purely historical inequities".
The review, conducted behind closed doors late last year with only lobbyists from the private-school and Catholic Church-school systems invited, said the cost of maintaining the existing SES system would be $26.5 billion over the next four-year cycle.
"Although the retention of funding maintained was strongly supported by the majority of stakeholders, with the National Catholic Education Commission regarding it as being 'at the centre of the offer made by the minister to Catholic systems', it is not consistent with the Government's objective of funding all schools on a consistent needs basis," the review states.
NSW Catholic Education Commission chief Brian Croke said that funding is not entrenching historical inequity.
"You can't say to a school that from next year you will lose teachers and funding. You wouldn't do it to a government school and it would be absurd to do it to any school. Schools need stability and continuity in resourcing," Mr Croke said.
Australian Education Union president Angelo Gavrielatos, said the revelations provided evidence that warranted an immediate review of the Government's "flawed, discredited and corrupt funding model".
Rudd to review school funding (SMH 11/02/08)