Prime Minister Tony Abbott speaks at a joint press conference with Foreign Minister Julie Bishop and Attorney-General George Brandis in Canberra on Tuesday. AFP photo

AFP

Australia will toughen laws to target home-grown terrorists and those who fight overseas over fears violent jihadist citizens in Syria and Iraq will return home, officials said on Tuesday.

Prime Minister Tony Abbott said the terror threat to Australia had not subsided since the September 11, 2001 attacks and remained at the highest level it had ever been.

Officials have said up to 150 Australians are fighting alongside militants overseas, with warrants issued last week for two Sydney men suspected of fighting in Iraq, including one who posed for photos with severed heads.

"We've all seen the truly shocking images of Australians born and bred doing absolutely horrific things to surrendering Iraqi police and military personnel," Abbott told reporters in Canberra.

"What we are now acutely conscious of is the danger posed back here in Australia by people returning to this country who have been radicalised and militarised by the experience of working with terrorist organisations overseas."

Counter-terror legislation under preparation would make it easier to identify, charge and prosecute people who have been engaged in terrorist activities overseas, and prevent extremists departing, Abbott said.

It will also make it an offence to travel without a valid reason to a so-called designated area, as nominated by intelligence agencies.

The laws will also attempt to ensure officials are best able to monitor potential terror activity in Australia while including "the usual range of safeguards and warrants", the prime minister said.

In making the announcement, Abbott revealed that proposed changes to a law banning racial slights, which ethnic minorities had warned could give licence to bigotry, had been shelved.

The government had planned to repeal a section of the Racial Discrimination Act that makes it illegal to "offend, insult or humiliate another" because of their race, saying it should not be used to stifle free speech.

Abbott said he had made a "captain's call" to dump the proposals.

"I don't want to do anything that puts our national unity at risk at this time, so those proposals are off the table," Abbott said.

The prime minister said Aus$630mn (US$588mn) would be spent over four years to boost counter-terrorism via security and intelligence agencies.

The government also plans legislation to improve the collection and admissibility of evidence abroad and update Australia's telecommunications interception law, which predates the Internet era.