High Court rules GST is payable when an insurer pays the plaintiff direct

The Mainzeal collapse has produced yet another court decision. The directors’ insurer paid Mainzeal $20 million following judgment against the directors. But does Mainzeal have to pay GST? And if so, can it claim that from the insurer?

To answer that, let’s start with how damages normally work. If a defendant pays damages to a plaintiff, that payment usually does not attract GST: the plaintiff is not making a supply.

If the defendant then claims that amount from their liability insurer, a special insurance rule applies, and GST is payable on the insurance payment. Most liability insurance policies pay the insured GST in addition to the sum insured. So if the sum insured is $20 million, the insurer pays the defendant insured $23 million. The defendant pays Inland Revenue GST of $3 million, and the insurer deducts the $3 million in its GST return.

But what happens if the insurer pays the plaintiff directly? That’s what happened in Mainzeal. The liquidators asserted a statutory charge over the insurance money, and the insurer paid Mainzeal $20 million.

Inland Revenue said that this payment included GST of $2.6 million. The case turned on whether the ordinary rule applied – a plaintiff doesn’t pay GST on damages – or whether the special insurance rule did – requiring GST to be paid on insurance payments.

The High Court accepted that the wording of the special insurance rule was “internally inconsistent” and had a “lack of coherence”. Inland Revenue’s position would require a plaintiff to pay GST if it received the payment direct from the insurer, but not if it received the payment from the defendant (who then claims from its insurer). But, the Court concluded, the legislative history supported Inland Revenue’s position. Mainzeal had to pay GST.

Could Mainzeal claim GST from the insurer? The policy says that, where the insured is liable to pay GST under the special insurance rule, the insurer must indemnify the insured for the cost of that GST (in addition to the sum insured). But the High Court ruled that Mainzeal could not claim under this clause, because it was not making a claim under the policy as an “insured” – even though it was Mainzeal’s own policy. Instead of claiming as an insured, it was claiming as a third party to the policy under a statutory charge.

As a result, Mainzeal retained only $17.4 million of the insurance payment. The other $2.6 million went to Inland Revenue, matching the insurer’s right to claim a corresponding deduction.

One way of looking at the case is that it’s a natural consequence of the operation of the statutory charge, the special insurance rule for GST, and the policy wording. Another way is that it elevates form over substance. It will be interesting to see whether there is yet another Mainzeal appeal, and if so how the appellate courts reconcile these provisions.