School systems are a major social change agent capable of challenging social inequalities and economic disadvantages. Yet, while schools in Australia are being confronted with increasingly culturally diverse populations as well as an increasing focus on student retention, this transformative role is increasingly being played out in a broader educational context that has been found to replicate rather than challenge patterns of social inequality. Successive governments in Australia have responded to this context with a raft of policy initiatives. This paper, based on three-year longitudinal research undertaken in the city of Melbourne, outlines this policy context and introduces the theoretical approach that underpins its innovative approach to managing cultural diversity in educational institutions. It argues for, and presents, a multidimensional model for managing cultural diversity in schools, one that provides the tools for transformative practices to be undertaken to effect positive change in school environments for the benefit of all students.