Abbott made the comment while announcing Australia would likely join humanitarian airdrops and even airlifts of endangered civilians threatened by Sunni extremist IS militants in a barren northern Iraqi mountain range, possibly later this week
The picture, taken in the northern Syrian city of Raqa, was posted on the Twitter account of Khaled Sharrouf, an Australian man who fled to Syria last year and is now an IS fighter, The Australian newspaper said.
Underneath it were the words "That's my boy".
Another photo published by the newspaper shows Sharrouf dressed in camouflage fatigues posing with three young boys it said security agencies believe are his sons.
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All are holding guns in front of the flag of the Islamic State.
Abbott, speaking to ABC radio from the Netherlands, said the pictures showed the barbaric nature of the terrorist group.
"And this does pose extraordinary problems... Not just for the people of the Middle East but for the wider world.
"And we see more and more evidence of just how barbaric this particular entity is."
Australia has an arrest warrant out for Sharrouf, who has also been pictured posing with severed heads. Officials have said up to 150 Australians are fighting alongside militants overseas, mostly in Iraq and Syria.
"Australia will gladly join the humanitarian airlift to the people stranded on Mount Sinjar, this is a potential humanitarian catastrophe, President Obama has said it's a potential genocide," he said.