Abbott made the comment on Monday while announcing Australia would likely join airdrops of food and supplies to thousands of Iraqi civilians besieged by Islamic State fighters and may even participate in airlift operations to take them to safety, 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 Islamic State fighter, The Australiannewspaper said.
It reportedly shows Sharrouf's seven-year-old, Sydney-raised son dressed like any other young boy in blue checked trousers, a blue shirt and baseball cap, struggling to hold up the severed head of a slain Syrian soldier by his hair.
It was captioned with the words: "That's my boy."
All are holding guns in front of the flag of the Islamic State, a group that has swept across Iraq and Syria, seizing large areas of territory.
Abbott, speaking to ABC radio from the Netherlands, said the pictures showed the "barbaric" nature of the Sunni fighters formerly known as the Islamic State of Iraq and the Levant (ISIL).
"What we've got to appreciate is that Islamic State - as they're now calling themselves - 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, a terrorist nation," he said.
"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."