Tony Abbott had planned to hold talks with President Susilo Bambang Yudhoyono and attend the Open Government Partnership Conference on Tuesday.
But an 'on-water operation' involving an asylum seeker boat has prompted him to cancel.
The trip had been at the Indonesian president's invitation.
The meeting would have been the leaders' first since damaging reports emerged that Australia had spied on the President and his wife.
Last month, the Australian Navy sacked a ship captain for breaching Indonesian territorial waters during Operation Sovereign Borders activities.
The government said a second captain was sanctioned and five others counselled about their responsibility to ensure their vessels stay out of Indonesian territorial waters.
Six incursions, involving seven ships, occurred during Operation Sovereign Borders operations between December 2013 and January 2014.
