Indonesia's partnership with Australia is now "solid and strong", but challenges remain, President Susilo Bambang Yudhoyono has told federal parliament.

Dr Yudhoyono, addressing a joint meeting of parliament's both houses in Canberra on Wednesday, said there still needed to be a change in the mindset of some Indonesians and Australians.

"The most persistent problem in our relation is the persistence of age-old stereotypes... that depicts the other side in a bad light," he said.

"There are Australians who still see Indonesia as an authoritarian country or a military dictatorship or as a hotbed of Islamic extremism, or even as an expansionist power."

On the other hand some Indonesians remained afflicted by "Australia-phobia".

"Those who believe that the notion of White Australia still persists. That Australia harbours ill-intention towards Indonesia."

Dr Yudhoyono said more work was needed to strengthen economic ties between Indonesia and Australia.

Indonesia had a GDP of $US514 billion, the third highest growth of G20 nations, a population of 240 million, a growing middle class and rich natural resources, he said.

Meanwhile, Australia, a developed nation, had the 18th largest economy in the world, with high-level corporate governance and a GDP of $US920 billion. He said Australia was the 12th highest investor in Indonesia, with interests in 26 projects worth $US79 million in 2009.

"We need to do better to harness these economic benefits, we need to encourage our private sector to do more business with one another."

Dr Yudhoyono said there had been 69 ministerial visits between the two nations since the Rudd government came to office.

He announced a new annual leaders retreat, that will take place alternatively between the two countries. Indonesia's and Australia's foreign and defence ministers will also meet annually.

"I am sure that this new arrangement will further cement Indonesia-Australia relations and enhance trust between us."

Dr Yudhoyono said legislation would soon be introduced to the Indonesian parliament that would make people smuggling a criminal offence that would carry a penalty of up to five years in prison.

Both Australia and Indonesia agreed that people smuggling was a regional problem, he said.

"Indonesia and Australia believe in the authority of the Bali process which recognises that people smuggling is a regional problem that requires a regional solution involving the origin, transit and destination countries to work together."

An agreement between the two countries to establish a framework for greater co-operation on tackling people smuggling would ensure future cases could be handled in a "predictable and co-ordinated way".

Dr Yudhoyono said the great challenge for Indonesia and Australia was how to respond to issues such as terrorism, natural disasters, people smuggling and drug traffickers.

Infectious diseases, the world financial crisis and climate change were also new, non-traditional threats that he said the two countries had to tackle.

"I believe that Indonesia and Australia are on the same page on the need to foster a more democratic world order, to reflect the changing global political and economic landscape," he said.

Earlier, Prime Minister Kevin Rudd welcomed Dr Yudhoyono as the president of a neighbour, friend and a member of the family of democracies.

"We are neighbours by circumstance but we are friends because we have chosen to be friends," Mr Rudd said.

"Now our relationship enters into a new phase when together we work in the great institutions of our region and the world to build a better region and to build a better world."

Opposition Leader Tony Abbott supported Mr Rudd's remarks. But he also took a veiled swipe at federal Labor over its border protection policy.

"We have worked together (with Indonesia) to end people smuggling since 2001," Mr Abbott told parliament.

"We have worked to end people smuggling before, it worked when we worked together before, people smuggling has started again and we can stop it again provided it's done co-operatively... with the right policies in place here in Australia."

Dr Yudhoyono said Indonesia remained relentless in its fight against terrorism. "In recent weeks we were able to disrupt terrorist cells operating and training in Aceh and in other places in Indonesia,' he said.

On climate change, the president said he and Mr Rudd had worked closely together since the UN conference in Bali two years ago.

"I appreciate the opportunity to work constructively on the Indonesia-Australia forest carbon partnership," he said, acknowledging Australia's support for Indonesia's initiative of forming the Group of 11 tropical foreign nations or F11.

Dr Yudhoyono said he was grateful also to the Australian government for supporting the Bali Democracy Forum which was launched in September 2008, the only intergovernmental forum in Asia on the issue of democracy.

Dr Yudhoyono also used his speech to honour Australians who died in Indonesia while working to serve both nations.

He named the nine Australian military personnel killed in a helicopter crash in Nias while responding to the 2005 earthquake, the Australian officials and journalist killed in the 2007 Jogjakarta plane crash, as well as the trade official killed in last year's bombing of the Jakarta Marriot.

"Let us honour them by continuing their noble work to build bridges and help one another, for that is the business we are in," he said.

Dr Yudhoyono said there had been many ups and downs in the relationship between the nations. The high point had been Australia's support for Indonesian independence, while the rift over the independence of East Timor was an "all-time low".

An "emotional turning point" was the Australian response to the Boxing Day tsunami.

"It was Indonesia's darkest, darkest tragedy ever," Dr Yudhoyono said. "But I was so proud to see Australian soldiers and the TNI (Indonesian army) troops working together to save lives and bring relief to the suffering."

Indonesia was glad to return the favour after the Victorian bushfires of 2009, and now viewed Australia as a "country of choice" for tourists and students.

Parliamentarians gave the president a standing ovation after his speech.