This problem has been solved, thanks to CS-Lab. I had to change output 2 and 3, which are used for CW/CCW drilling, to output 7 and 8.

Explanation by CS-Lab:

The problem is not the CSMIO/IP controller but the solution you used.
 In the current situation, by calling the macro M202, you cause Mach3 to wait for the "THC On" signal.
 
How is this possible?
 
For you to understand this, I will explain it in a few steps:
1.   In the M202 macro, you activate virtual output number 2 using the ActivateSignal(output2) command.
2.   Activating virtual output number 2 is equivalent to calling the M4 macro. This is because in "Config/Ports and Pins/Spindle Setup" for "CCW (M4)"  you have set virtual output number 2.
3.   When THC function is active, macro M4 and M3 are treated equivalently.
 
In summary, by calling a macro M202, you are actually calling macro M3, which causes Mach3 to wait for the "THC On" signal.

I know its a long shot as this is an old thread!
But I am having exactly the same issue with the G92 not setting Z axis to 0,
I have read about using the M31 macro provided by cslabs but am unsure how all that works,
Or should i just give up and use G28.1?

cheers!

I don't know how the M31 macro works, but if it's easier to use G28.1 just use that.

You could always ask CS Lab for support. Their answer helped me getting the machine working.

I will give the G28.1 a go, did you find a good post processor that uses that instead of G31?
I used the same post as you as i thought the G31 would work well with ohmic sensing

I am also tempted to give their SimCNC software a go to see if that is any good!

thanks very much for replying!!

I think G28.1 was already in the postprocessor. It's been a while since I've worked on this. This is what I could find:
function Reference()
   firstRef = false
   if (refHome) then
      post.ModalText(" G28.1 Z")
      post.Number(3 * scale, "0.00")
   else
      post.ModalText(" G31 Z -100")
   end
   post.ModalNumber (" F", refFeed * scale, "0.0###")
   post.Eol()
   post.ModalText(" G92 Z0.0\n")
   post.ModalText (" G00")
   post.Text(" Z")
   post.Number (switchOffset * scale, "0.0000")
   post.Eol()
   post.ModalText(" G92 Z0.0\n")
end
This code is on the top of the post processor file to use G28.1 instead of G31.
--If this value is set to true then use G28 (home) for the Z reference
--Set it to false for G31 probe
refHome = true