If an expense is non-deductible, it means your business cannot claim a deduction for the expense against its income. It also means that the expense can't be used to reduce PSI attributed to the individual which is included in their individual tax return.
To prevent double taxation, where a payment to an associate (for example, a salary payment) is non-deductible under the PSI rules, the amount received by the associate is not included in their assessable income.
Julie is a sole trader who pays a salary to Frank to do the bookwork and run the home office (that is, non-principal work). Julie is not entitled to claim a deduction for the salary she paid to Frank because he was not performing principal work.
As Julie cannot claim a deduction for the salary she paid to Frank, the salary Frank received is not included in his income tax return as assessable income. Any PAYG withholding tax Julie paid on behalf of Frank is credited to Julie when she completes her individual tax return.
End of example
Fringe benefits tax on non-deductible expenses
If you have to pay fringe benefits tax (FBT) on an expense that is non-deductible under the PSI rules, the taxable value of the fringe benefit is reduced by the non-deductible amount.
If you received personal services income (PSI) and the PSI rules apply, the rules limit the deductions you can claim against this income.