As soon as Italy signed the armistice, the Australians asked for more Italian POWs to put them to work. They transferred from India as many as they could.
I just discovered that in October/November 1943, the Americans told the British that, as Italy was a cobelligerent, the Italian soldiers captured while Italy was allied with Germany should no longer be considered POWs.
According to the Americans, the Italian POWs should have been organised into military units of the Italian armed forces to be placed under American or British command.
The Fascists among the POWs would be considered part of the armed forces of the newly formed Italian Social Republic, which was allied with Germany. Despite being held by the Allies, they would be considered prisoners of the Royal Italian government, which was fighting the Germans and the “Repubblichini” beside the Allies.
In this way, the Americans hoped to increase the number of Italian troops fighting against the Germans. I think it would have been the right thing to do and we have to give credit to the Americans for proposing it.
But the British (the Australians had no voice in this issue, as they were just seen as one of the states under British hegemony) were concerned that it would be difficult to maintain discipline of Italian troops placed under Allies’ control. They pointed out that, once the Italians were freed, it would not be possible to change their status back to that of POWs. As a result, they insisted that the Italians should remain POWs.
In the end, the British managed to convince the Americans.
That’s why the Australian government was able to use Italian POWs as a cheap labour force for the following three years.
I can’t help it but speculate that the British found the Italians more useful as farmers than as soldiers and acted accordingly, without much consideration with what would have been morally right. I might be wrong...