Non-deductible expenses cannot be claimed against your PSI. These expenses cannot be used to reduce PSI attributed to the individual, which is included in their individual tax return.

To prevent double taxation, where you make a payment to an associate (for example, a salary payment) that is non-deductible under the PSI rules, the amount received by the associate is not included in their assessable income.

Example

Karla is a sole trader who pays a salary to Josh to do the bookwork and run the home office (that is, non-principal work). Karla is not entitled to claim a deduction for the salary she pays to Josh because he is not performing principal work.

As Karla cannot claim a deduction for the salary she pays to Josh, the salary Josh receives is not included in his income tax return as assessable income. Any PAYG withholding tax Karla pays on behalf of Josh is credited to Karla when she completes her individual tax return.

Fringe benefits tax on non-deductible expenses

If you have to pay fringe benefits tax 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.