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Rugby Australia CEO Raelene Castle confirmed the move tonight, saying that unless the organisation receive "compelling mitigating factors", they plan to sack Folau, having received no response from the Waratahs star after he posted anti-gay comments on social media last night.
Folau has a history of making controversial, homophobic comments and his latest effort called on "drunks, homosexuals, adulterers, liars, fornicators, thieves, atheists and idolaters" to repent for their sins or else "hell awaits" them.
Major Wallabies sponsor Qantas, who threatened to pull its sponsorship last year following a series of provocative posts from Folau, hit out over the post, calling it "really disappointing" and Rugby Australia confirmed they intend to terminate his contract.
"Rugby Australia and the New South Wales Rugby Union have made repeated attempts to contact Israel both directly and via his representatives since 6.30pm on Wednesday, and at this point he has failed to communicate directly with either organisation," the statement from Castle and New South Wales CEO Andrew Hore read.
"Whilst Israel is entitled to his religious beliefs, the way in which he has expressed these beliefs is inconsistent with the values of the sport. We want to make it clear that he does not speak for the game with his recent social media posts.
"Israel has failed to understand that the expectation of him as a Rugby Australia and NSW Waratahs employee is that he cannot share material on social media that condemns, vilifies or discriminates against people on the basis of their sexuality.
"Rugby is a sport that continuously works to unite people. We want everyone to feel safe and welcome in our game and no vilification based on race, gender, religion or sexuality is acceptable and no language that isolates, divides or insults people based on any of those factors can be tolerated.
"As a code we have made it clear to Israel formally and repeatedly that any social media posts or commentary that is in any way disrespectful to people because of their sexuality will result in disciplinary action.
"In the absence of compelling mitigating factors, it is our intention to terminate his contract."
Folau had just last week become Super Rugby's all-time leading try-scorer, and if terminated, he would be unable to complete the season with the Waratahs, or play for the Wallabies at the Rugby World Cup.
The 30-year-old had only last year signed a four-year-deal, which had him labelled as rugby's highest paid player.