The farm was located in rural Australia in Queensland. She says the farmhand lived in a small shack separate to the house and he helped with fark work. Were POW's sent out to places like this? There was no real security keeping him there and I was wondering the reasons behind this policy.
Well, there was a Prisoner of War/Internment camp at Gaythorn/Enoggera, then a rural area of QLD although now suburbs of Brisbane, during WW2 and records at the National Archives of Australia do indicate that Italian prisoners of war/internees were released to work on farms and on the trans Australia railway. I haven’t been able to find records from the QLD camps in particular relating to farm workers but there doesn’t seem to be any reason to disbelieve your grandmother if she lived in that part of QLD.
The records don’t really differentiate between POWs and Internees although it should be noted that under the Geneva Convention POWs could be required to work. Internees were different. They were civilians and would have to be paid normal wages if they worked. There were severe manpower shortages during the war. Italian POWs were considered low risk. They were seen as not wanting to continue fighting and realistically had nowhere to escape to from Australia.
Reference: National Archives of Australia: Series D2285