MZ/MuZ Riders

I've changed this seal three times in the last 5-6 years. I know the original etz250 master cylinders have problems with the piston interfering with the body- but on this occasion it made me wonder if I had installed it in the correct orientation? Thoughts?

Yes, you installed it the right way.
I think that the brake housing is worn out...

Seems nibbled by the rats... Corrosion in the bore?
Look inside the bore of the master cylinder. If you get the damage after replacing the brake fluid: that's when the lever goes all the way down, so the damage may be in the far end of the bore. Brake fluid is hygroscopic, and for that reason it needs to be replaced regularly, to avoid corrosion. Maybe it has stayed in the system for too long, at some time in the past.

Thanks for the clarification.

This has happened three times now and the bore was fine when I looked the last two times. But I agree it seems like the master cylinder has that unfortunately common problem.

I do not know what the clearance piston - bore is supposed to be for this, but that clearance might just be too much?
Maybe check with a tool like this (which I thought you had?):I understand the nominal ID should be 13mm, and you may find wear along the bore with such a tool.