The defence minister has denied Indonesian military personnel might be "recruited" as spies as Australia works to repair the damaged relationship with its neighbour.
Federal Defence Minister Marise Payne said she is hopeful Indonesia will restore military co-operation with Australia once an investigation into offensive material seen at Perth military base is finalised.
In a surprise announcement Indonesia has put on ice all forms of military co-operation and training with Australia.
"I would hope at the conclusion of the inquiry, when we're able to indicate to Indonesia the steps that have been taken in Australia to address any of these concerns, we'll be able to discuss resuming the relationship across the board then," Senator Payne told ABC Radio.
Indonesia's military chief General Gatot Nurmantyo has been quoted by the ABC saying he stopped sending his best soldiers for training in Australia out of fears they would be "recruited".
Senator Payne denied the claim.
"It is something we would not countenance," she said.
It's believed the offensive material involved a reference to West Papua and the ridiculing of Indonesia's national ideology, Pancasila.
Senator Payne said Australia had taken Indonesia's concerns seriously and she defended the pace of the inquiry, saying it was close to being finalised.
"The investigation requires an examination of materials, interviews with the Australians involved and an opportunity for the Indonesian officer to comment, these things need to done appropriately and fairly which takes time," the minister said.
She knew about the issue back in November, however only wrote to her Indonesian counterpart this week.
The issue had been handled between Australia's chief of defence force and chief of army, Senator Payne said.
A group of Indonesian military staff college students was due to visit Australia but that arrangement was cancelled.
Senator Payne said Indonesia's participation in an upcoming muli-national naval exercise is up in the air.
Indonesia's Defence Minister Ryamizard Ryacudu has said the Australian lieutenant involved in the incident had been punished.
But Senator Payne refused to confirm any action.
Retired Major General Jim Molan predicts the issue will blow over soon.
"We can be insensitive at the bottom level, not at the top level," he told Sky News.
The former military man said he did not expect the incident to disrupt ties between the two nations' intelligence communities and could lead to better understanding between the neighbours as a whole.
"We can be irreverent at the bottom level and the Indonesians can be overly sensitive all the way up and down their chain."
News break - January 5