The photograph was posted by terrorist Khaled Sharrouf on Twitter and captioned, "Thats my boy!", The Australian reported.
Sharrouf, who was jailed in 2009 for four years for being part of a cell planning attacks in Sydney and Melbourne, has now joined Islamic State (IS) previously known as Islamic State of Iraq and Greater Syria (ISIS) militants in Syria.
After his release he was banned from leaving the country but used his brother's passport to travel to Syria with his family.
Another picture showed Sharrouf wearing combat fatigues posing with three children believed by security personnel to be his sons.
"What we've got to appreciate is that IS is not just a terrorist group, it's a terrorist army and they're seeking not just a terrorist enclave but effectively a terrorist state," Abbott told Australian radio from the Netherlands.
"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," Abbott added.
Australia issued a warrant for Sharrouf's arrest in July after images emerged on what is thought to be his Twitter feed of another Australian, Mohamed Elomar, holding the severed heads of Syrian soldiers.