The National Aboriginal Legal Service says its loss of annual funding by a new Federal Government body is politically motivated.

The Aboriginal and Torres Strait Islander Service (ATSIS), which was set up this month, has rejected an application for $600,000 in funding for the National Aboriginal and Islander Legal Services Secretariat (NAILSS).

Its Queensland branch, QAILSS, has been assured funding for six months.

The Bidjara Group in Charleville in south-west Queensland could lose funding of up to $5 million.

NAILSS chairman Frank Guivarra says it is paying the penalty after re-electing Aboriginal and Torres Strait Islander Commission (ATSIC) deputy chairman Ray Robinson, despite a directive from the Federal Government that it was a perceived conflict of interest.

"Rightly or wrongly they voted for Ray Robinson, re-elected him as chairman of this organisation," Mr Guivarra said.

"It seems as I've said in the past, we are paying, NAILSS and its members are paying the price for that."

Mr Guivarra says he believes the decision is politically motivated because up until June Mr Robinson sat on the boards.

"Without hearing it directly from the Minister or the hierarchy of ATSIS, there is a political motive and if one reads the letter from ATSIS there is a great sense of vindictiveness towards this organisation," he said.

Mr Robinson resigned from NAILSS in June.

Meanwhile, a spokesman for Indigenous Affairs Minister Philip Ruddock rejects claims it is trying to sideline Indigenous leaders but says it is trying to address any perceived conflict of interest.

ATSIS has refused to comment on the funding process but says it will be calling for tenders for the services provided by the legal service.