GST on payments by insurers to third parties – guidance from Mainzeal v CIR and Mainzeal v QBE

The proceedings concerned a GST liability Mainzeal incurred following receipt of insurance proceeds from QBE in the wake of the Supreme Court’s final decision on the liquidators’ claims against the Mainzeal directors.  As against:

• The CIR, the liquidators sought declaratory relief that the payment Mainzeal received from QBE is not subject to GST (CIR Proceeding).
• QBE, this proceeding sought that it indemnify Mainzeal for any GST liability it had under s 5(13) (QBE Proceeding). McElroys acted for QBE.

In the CIR Proceeding, following a review of its provenance and purpose, the Court determined that s 5(13) imposes a GST liability on the actual recipient of a payment made under a contract of insurance. The judgment considered the amendments to s 5(13), including the insertion of the wording “whether or not the person is a party to the contract”, as to the intended scope and operation of the provision  in relation to payments made by insurers to third parties. After considering the legislative history and relevant cases¹, the Court determined that the inclusion of that wording was intended to deal with the situation of payments by insurers to third parties. The Court ultimately found that Mainzeal had incurred a GST liability.

In the QBE Proceeding, Mainzeal argued that, irrespective of the outcome in the CIR Proceeding, QBE was obliged to “gross up” the indemnity payments made to Mainzeal if it were liable to pay GST on the sums received.  Mainzeal relied on the GST clause in the policy, which provided that where “the Insured” was liable to pay tax under s 5(13) QBE would indemnify it for such payment.

The Court considered the definition of “the Insured” under the policy.  Although Mainzeal was named as an “Insured Company”, it was not the party making the insurance claim to QBE.  Rather, its claim arose by virtue of the proceedings against Mainzeal’s directors and operation of a statutory charge under s 9 Law Reform Act 1936. The Court held that the indemnity payable was in respect of the directors’ liability to Mainzeal.   Mainzeal was the third party claimant only, not “the Insured” who was entitled to the benefit of the GST clause.  Any GST liability for Mainzeal following receipt of the payment from QBE is its concern.

For insurers, these judgments clarify the basis on which third party claimants may be required to account for GST on receipt of proceeds under a contract of insurance, whether they are a party to that contract or not.  While it is common for GST considerations to be one of the last issues to consider when debating the terms of a settlement agreement, or in respect of payments following a court or arbitral award, these judgments confirm that – particularly where the sums involved are significant – careful consideration should be given to the potential GST implications arising from these payments.

This is particularly so if a third party claimant later incurs a GST liability on receipt of funds under a contract of insurance, whether they know the identity of the source of the payment or not, and the potential for future claims to be brought relating to any shortfall arising from a GST obligation.  While the wording of the particular insurance policy may guide whether or not an insurer is obliged to account for GST to its insured on payment of any insurance proceeds, it is unlikely this would extend to third parties unless expressly provided for in the policy or agreed by the insurer to facilitate settlement.

1. Pegasus Group Ltd v QBE Insurance (International) Ltd HC Auckland CIV-2006-404-6941, 24 September 2010 and Southland Indoor Leisure Centre Charitable Trust v Invercargill City Council [2015] NZHC 1983.

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