During his ban, Smith has played T20 in Canada and the Caribbean before his aborted spell in Bangladesh.
The news about Smith's ruling out of the PSL was confirmed by Pak Passion, mentioning he will undergo a surgery on January 15 to fix a right elbow ligament and is likely to be "in a brace" for six weeks followed by an extensive rehabilitation.
Smith was initially expected to return to global cricket in a one-day series against Pakistan in April.
The injury flared up when Smith was captaining his BPL side for the first two games and was seen with heavy strapping over the irritated area.
The surgery comes as a major blow to Smith's return to the national side with his 12-month ban for ball tampering coming to an end in March.
Smith went for scans on Saturday and the news does not sound overly positive for the 29-year-old, who has to go under the knife next week and wait at least six weeks before knowing just how severe the injury is and in turn, the rehabilitation period. He has also played regular grade cricket for Sutherland and has trained with the New South Wales and Sydney Sixers squads but now faces an even bigger challenge to be ready for the demands of a World Cup campaign. The Australian underwent tests and has been advised six weeks of rest by the physicians which means he will not only be out of the ongoing BPL but also the Pakistan Super League (PSL) which is due to be played between February and March. The batsman last played an ODI for Australia in January 2018, against England.