Mr Abbott has steadfastly refused to comment on the allegations that first surfaced in Fairfax Media reports a fortnight ago, citing "operational" concerns.

But in a speech to the NSW Liberal Party faithful in Sydney on Saturday, Mr Abbott attacked Opposition Leader Bill Shorten's handling of the allegations – and in the process, came perilously close to admitting they were true.

"On Monday, Mr Shorten attacked us for allegedly doing something to turn around boats, which it turned out that he had done exactly the same," Mr Abbott said.

"Only it didn't work when they tried to do it. Because they never turned around a single boat."

Asylum seekers and an Indonesian police chief claim an Australian official boarded a boat carrying 65 passengers and gave each crew member $US5000 on the condition that they return to Indonesia and stop smuggling.

Labor has been accused of also paying people smugglers when it was in power, in order to get information about their syndicates. But the opposition says that  is very different from paying them to take asylum seekers back to Indonesia.

Deputy Opposition Leader Tanya Plibersek on Saturday said the government still had many questions to answer.

"They need to explain to the Australian people exactly what's happened here," Ms Plibersek told reporters in Sydney.

"A proper investigation should always take place in a situation like this. What is extraordinary is that we have the Foreign Minister and the Immigration Minister flat out deny it and then the Prime Minister seemed to indicate that this may have happened."

Ms Plibersek said the allegations were putting "unprecedented strain" on Australia's vital relationship with Indonesia.

Labor on Friday said paying people smugglers to turn boats around was akin to paying murderers not to kill. But it is still deciding whether to support a Greens-led Senate inquiry into the allegations.

It has also emerged that Greens senator Sarah Hanson-Young last week referred the allegations to the Australian Federal Police. She wants to know whether the government's actions could consitute people trafficking, people smuggling or money laundering.

"The AFP is currently undertaking an evaluation of this matter," the AFP said in its response to the senator on Friday. "You will be advised of the outcome in due course."

- With Francesca Wallace