The key event that upset Australia’s relationship with Indonesia was the former’s support of East Timor’s referendum on independence from the latter’s brutal grip.
Once a Portuguese colony, East Timor was invaded and annexed by Indonesia in 1975. A Christian enclave amid the vast expanse of Muslim Indonesia’s thousands of island, an independence movement emerged in East Timor that was immediately the target of Indonesian military and security operations aimed at crushing it. Toward that end, thousands of East Timorese suffered abuse and discrimination. The 1999 referendum on independence that passed overwhelmingly in East Timor provoked an even more brutal response from Indonesia, which supported anti-independence militants. Australian support for and participation in the United Nations peacekeeping force that was dispatched to East Timor to protect the population against violence angered the Indonesians and created the most serious rift in the relationship between those two countries since the 1965 Indonesian civil war.
Prior to the East Timor declaration of independence, relations between Australia and Indonesia had been motivated primarily by a shared opposition to communism in Southeast Asia and to the trade benefits that accrued from their geographic proximity to each other. With the passage of time and the stabilization of the situation in East Timor, that relationship has returned to normal, with security agreements and trade relations cementing the two countries in the kind of bond that existed prior to the conflict in East Timor.