Well headstand definitely aren't banned or even discouraged by USA gymnastics. Although none of the current girls compulsory routines have them, there is still a headstand press in the current level 4 boys base routine (the bonus is to do a handstand press or stalder). So apparently USA gymnastics and Gymnastics Australia are at odds on this issue.
If you take the developmental courses in the USAG university they have a part about headstands not being restricted for preschools because they serve a developmental and progressive purpose. It's also an allowable acro skill in the lower Xcel levels. Head stands are also used in the WAG developmental coaches coaches and MAG essential elements as a progression for a forward head spring which is a progression for the vault and handspring ending positions.
So, is it safe for preschool? It's not any more or less safe for other things when proper technique is taken into account. CoachMolly, it sounds like you certainly observed a problematic approach to the skill. However, had he told the children to practice handstands, you likely would have observed similar things. Had he told the children to practice pullovers on the bars, you would have surely observed problems. So, was it the skill, or was it the teaching technique? I can assure you with my teaching technique the average 4 year can do the proper positioning for headstand and head and achieve a straight supported position. For the boys this is necessary again because it is an element in the level 3 and 4 routines.