When Insurance Proceeds Attract GST: Key Implications of Mainzeal v CIR
The High Court’s latest decision in the Mainzeal saga (Mainzeal Property and Construction Ltd (in liq) v McKay and The Commissioner of Inland Revenue [2026] NZHC 2715) confirms that the actual (GST-registered) recipient of a payment made under a contract of insurance must account for GST on that payment, regardless of the circumstances.
The decision clarifies the operation of section 5(13) of the Goods and Services Tax Act 1985, and confirms the position for insurers and any GST-registered business involved in commercial litigation where damages may be funded by insurance.
Key Points
Any GST-registered plaintiff should:
- ensure that they are aware of the defendant’s insurance arrangements, to assess net recovery; and
- plead the claim, and structure any settlement, to account for the GST exposure from the outset.
Insurers should obtain early clarification of whether a plaintiff is GST registered. If they are, this should be factored into reserves and settlement strategy, as the plaintiff can be expected to seek a GST gross-up in settlement negotiations, increasing the effective cost of claims.
Although the existence and extent of a defendant’s insurance have long been considered irrelevant in court proceedings (because it goes to ability to pay, not liability), the existence of insurance will now always be relevant in assessing the quantum of the claim, at least where the plaintiff is GST registered.
The Decision
Mainzeal Property and Construction Limited, once one of New Zealand’s largest construction companies, was placed into liquidation in 2013. Following litigation that reached the Supreme Court, four of Mainzeal’s former directors were found to have breached their duties to the company. Mainzeal’s liquidators recovered approximately $20 million from QBE Australia, paid on behalf of the directors under a Directors and Officers Liability and Company Reimbursement Insurance Policy.
The central question was whether the payment attracted GST under section 5(13) of the Goods and Services Tax Act 1985, which deems a payment received “under a contract of insurance” to be consideration for a supply of services where it relates to a loss incurred in the course of the recipient’s taxable activity. The liquidators argued that a person only “receives a payment under a contract of insurance” if they suffered the insured loss – here, the directors were the insureds, not Mainzeal. The Commissioner’s argument was that it was sufficient for the payment to be sourced from insurance, and that the “loss” need not be the insured’s loss.
Tracey Walker J found for the Commissioner. Her Honour held that the 2000 amendment to section 5(13) was specifically designed to ensure that GST was payable by registered third parties when they received insurance-funded payments.
The Court concluded that the “loss” includes the third party’s loss, and that the words “whether or not the person is a party to the contract” were added to catch precisely this situation. The Court described the section’s language as “internally inconsistent” but was guided by the legislative history, finding that Parliament intended the actual recipient of the insurance-funded payment to bear the GST liability.
Unfortunately for Mainzeal, in the concurrently-issued Mainzeal Property and Construction Ltd (in liq) v QBE Insurance (International) Pty Ltd [2026] NZHC 2716, the Court also decided that the requirement in the policy for QBE to indemnify “the Insured” if it is liable for GST under s 5(13) does not extend to a payment to a third-party. This means that the GST owed is Mainzeal’s concern, not the insurers.
Practical Implications
The decision acknowledges that section 5(13) creates a notable inconsistency for litigation: GST incidence turns on who makes the payment. A GST-registered plaintiff awarded $1 million in damages for a business loss keeps the full $1 million if the defendant pays directly. But if the defendant’s insurer funds the payment, the plaintiff retains only approximately $869,565 after accounting for GST at 15%. The Court itself recognised this under-compensation risk, observing that it is “not clear why GST obligations ought to be dependent on who makes the payment.” This asymmetry will inevitably feature in settlement negotiations, with plaintiffs seeking to gross up claims to neutralise the GST impact.
In practice, claims should be pleaded and settlements structured to account for section 5(13) from the outset. Plaintiffs should make early inquiries about a defendant’s insurance arrangements, as the source of funds materially affects the net recovery.
What Should You Do Now?
- Insurers should review claims-handling protocols to incorporate early identification of third-party claimants’ GST registration status.
- Lawyers should plead claims to account for section 5(13) GST exposure – consider including an express head of claim or prayer for relief addressing GST gross-up where the defendant is insured.
- GST should be addressed expressly in settlement agreements, including whether the proposed sum is GST-inclusive or exclusive and providing appropriate warranties regarding the source of funds.
Looking Ahead
The Mainzeal decision provides important clarity on the scope of section 5(13), but it is unlikely to be the last word. The Court acknowledged the section’s “internal inconsistency,” and the policy consequences – particularly the under-compensation of claimants whose damages are funded by insurance – are significant.
In February 2020 Inland Revenue issued an issues paper canvassing the difficulties arising from section 5(13) and setting out options for reform, although nothing has eventuated. We will continue to monitor developments and report on any legislative changes or further judicial consideration of this issue.
