An Australian ship operator says he was told by Federal Government officials to sack his crew and replace them with foreign workers.

A piece of legislation currently before parliament seeks to abolish the requirement for foreign ships to pay Australian wages between domestic ports for the first 183 days in the country.

But there are fears that the coastal shipping reforms could see Australian ships competing with foreign ships with crews who were paid less than Australian crews.

At Senate committee hearing this week, North Star Cruises representative Bill Milby said his company was forced to consider scrapping plans to build a bigger ship, as it may not be able to compete if the legislation passes.

“The way that legislation stands at the moment, that will be off the agenda because of the uncertainty,” he told the Senate committee.

“We don't want to hire a foreign crew for an Australian operation that takes international and Australian tourists to iconic locations in Australia.”

Mr Milby said infrastructure and regional development department staff – specifically the officials Judith Zielke and Michael Sutton - had advised him that he should remove True North from the Australian Shipping Register, re-register it in a foreign country, sack the Australian crew and hire cheaper foreign workers.

“I am still speechless about it, I really am,” he said of the advice.

Both the prime minister and deputy prime minister have been asked about the claims, and said that Mr Milby was mistaken.

“I take offence at that,” he responded.

“I do not tell lies.”

Both the department official named by Mr Milby gave evidence on Monday. Ms Zielke agreed they had discussed various options, but said she had not told Mr Milby to sack his crew.

“I don't believe I gave advice that he should take that action,” she said.

Mr Sutton confirmed that they had raised reflagging as an option, but “we did not give any advice,” he said.

Earlier in the hearings, Kimberley Marine Tourism Association secretary Kylie Bartle said a flood of overseas operators could pose a safety risk.

“You've got reefs, you've got sandbars, all types of different things happening. It's a really treacherous part of the coast to cover,” she said.

“If you don't know what you're doing, there's a real potential to become unstuck, and it can be disastrous, for human lives, for vessels, but for the environment as well.”

Shadow transport minister Anthony Albanese has since told AAP reporters that the government should withdraw the legislation, and apologise to Mr Milby.

“What we know now for a fact is that departmental officials were giving advice to Bill Milby and others that the appropriate response .... was to remove the Australian flag from the back of his vessel, replace his Australian workforce with a foreign workforce, paying foreign wages and being trained offshore,” he said.

Mr Albanese believes the government is trying to marginalise the Maritime Union of Australia.

“They have an extraordinary proposition that Australian-based business should compete with foreign business doing work here on the domestic freight task but paying foreign wages,” he said.