The heads of Defence and the Home Affairs department deny there is a proposal for Australia's digital spy agency to be given new powers to spy on citizens at home.
News Corp Australia reported the new powers were outlined in letters between the heads of the Home Affairs and Defence departments and would allow the Australian Signals Directorate's (ASD) cyber sleuths to monitor Australian citizens and businesses on home soil.
But Defence secretary Greg Moriarty, Home Affairs secretary Mike Pezzullo and ASD director Mike Burgess released a joint statement on Sunday rejecting the report.
"There is no proposal to increase the ASD's powers to collect intelligence on Australians or to covertly access their private data," they said.
They said ASD's cyber security function was being enhanced under reforms agreed by the government last year, with legislation passing parliament establishing the organisation as an independent statutory agency within Defence.
But its function entails "protecting Australians from cyber-enabled crime and cyber-attacks, and not collecting intelligence on Australians".
"We would never provide advice to government suggesting that ASD be allowed to have unchecked data collection on Australians - this can only ever occur within the law, and under very limited and controlled circumstances," they said.
Earlier Foreign Minister Julie Bishop denied there was a plan to increase the powers of the directorate and when asked whether there should be, said "no".
"The current laws safeguard the privacy of Australians but also provide us with an opportunity to keep Australians safe," she told reporters in Cairns.
But Labor believes it is extraordinary the proposal has been leaked.
Shadow attorney-general Mark Dreyfus wants Malcolm Turnbull to establish an investigation into how such sensitive information was able to find its way into the news.
"The documents described in the media appear to be extremely sensitive and divulge information about one of Australia's key security agencies," he wrote in a letter to Mr Turnbull.
Deputy Labor leader Tanya Plibersek said Labor was happy to work with the government on national security, but had not been consulted on this issue and needed to know why any changes would be necessary.
The ASD at present can only gather intelligence on foreigners. Only domestic spy agency ASIO and the Australian Federal Police are allowed to access information at home and then only after obtaining a warrant signed off by the Attorney-General.
Under the proposal, all the department would need the approval of the ministers of Defence and Home Affairs - Senator Marise Payne and Peter Dutton - removing any judicial oversight.