GST on Damages Paid under a Liability Policy

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While the position with respect to whether a successful plaintiff needs to account for GST when receiving a damages award is well established, what has been less clear is whether the position is different when the defendant is insured for its liability to the plaintiff and the damages is being paid by an insurer under a liability policy. 

The reason for the uncertainty was s 5(13) of the Goods and Services Act.  It says that where “a registered person receives a payment under a contract of insurance… the payment is …. deemed to be consideration for a supply of services performed by the registered person”. This means that the recipient must account for GST on that payment.  

The High Court has recently clarified this section, in the context of a plaintiff seeking damages from an insured defendant. 

The plaintiff in this proceeding was the owner of the Southland Stadium. It sued the Invercargill City Council for the cost of repairing the stadium when it collapsed during a snow storm. The plaintiff was insured for damage with IAG, who took the proceedings against the Council pursuant to its rights of subrogation. The plaintiff argued for an interpretation of s5(13) of the Act that would have made the damages it was awarded subject to GST. 

The Council, on the other hand, argued that no GST was payable or claimable. 

The Court confirmed that the general rule is that no GST is payable on a damages award, as the plaintiff was able to (and did) claim an input tax credit on the GST component of the repairs it carried out. So if GST was included as part of the damages, the plaintiff would be overcompensated. Furthermore, damages by their nature are compensatory and there is no taxable supply. 

Crucially, the Court found that s 5(13) only captures payments made by the insurer to a person “entitled to the benefit of the payment, whether or not the recipient is a party to the insurance contract….[T]he Trust would be entitled to sue the Council regardless of whether it was insured. Thus the payment it receives from the Council is not ‘under a contract of insurance’”.

It is pleasing to see the Court giving greater clarity on what had been a troubling question. The tax position of a defendant who has insurance cover for the damages award is now aligned to an uninsured defendant.  This has got to be a good thing.