Two-dimensional mean wave-driven flow and setup dynamics were investigated at a reef-lagoon system at Ningaloo Reef, Western Australia, using the numerical wave-flow model, SWASH. Phase-resolved numerical simulations of the wave and flow fields, validated with highly detailed field observations (including >10 sensors through the energetic surf zone), were used to quantify the main mechanisms that govern the mean momentum balances and resulting mean current and setup patterns, with particular attention to the role of nonlinear wave shapes. Momentum balances from the phase-resolved model indicated that onshore flows near the reef crest were primarily driven by the wave force (dominated by radiation stress gradients) due to intense breaking, whereas the flow over the reef flat and inside the lagoon and channels was primarily driven by a pressure gradient. Wave setup inside the lagoon was primarily controlled by the wave force and bottom stress. The bottom stress reduced the setup on the reef flat and inside the lagoon. Excluding the bottom stress contribution in the setup balance resulted in an over prediction of the wave-setup inside the lagoon by up to 200–370%. The bottom stress was found to be caused by the combined presence of onshore directed wave-driven currents and (nonlinear) waves. Exclusion of the bottom stress contribution from nonlinear wave shapes led to an over prediction of the setup inside the lagoon by approximately 20–40%. The inclusion of the nonlinear wave shape contribution to the bottom stress term was found to be particularly relevant in reef regions that experience a net onshore mass flux over the reef crest.