However, the 20 June decision left open the option for the government to continue funding, either under new legislation or by a grant of funds to the states and territories.
The case was brought by father of four Ron Williams, who objected to the presence of a chaplain at Darling Heights State School in Toowoomba funded through the Australian Government's National School Chaplaincy Program.
The basis of his challenge was that under the Constitution, Commonwealth officers are not allowed to be subject to a religious test.
The court dismissed that claim, but did find that the Commonwealth had no power to enter the agreement which funded the program.
The national chaplaincy program was set up in 2007 and later modified to allow schools to choose either a chaplain or a non-religious student welfare worker.
More than 2000 school communities across Australia have chaplains.
Scripture Union Queensland incoming CEO Peter James said the decision meant that the work chaplains do across the nation will continue, as long as the government acts swiftly to ensure that funding continues.
Independent Schools Queensland Executive Director David Robertson also yesterday called on the Australian Government to continue the program, and praised Australian Attorney-General Nicola Roxon's commitment to do so.
"Chaplains offer important support and guidance in more than 100 of Queensland's 186 independent schools.
Schools are empowered to choose the person most appropriate for the chaplaincy and, in turn, the chaplains can respond to each individual school's needs."
The Uniting Church in Australia will examine closely the High Court judgment on the National School Chaplaincy Program and any subsequent government response to assess the implications.