Norton Rose Australia partner Ben Allen, an expert in disputes, says no one really knows, as the area of law is largely untested.

Mr Allen said the federal bureaucracy might be able to argue its information is exempt from Australia's free-trade agreement with the US, which came into effect in 2005.

''The government's present aversion to data being stored outside Australia is based predominantly on the issue of security, for which an exemption arguably exists under article 22.2 … It is yet to be seen whether the US Trade Representative will escalate this issue and trigger the dispute-resolution provisions.''

However, he added that, as most large cloud-computing providers were US-based, the Australian government would need to assess carefully whether its position complied with the trade treaty.

''Obviously, the extent to which the Australian government's present aversion is a barrier to free trade adds an additional degree of complexity to what is already a difficult area to manage and regulate.''

Federal privacy commissioner Timothy Pilgrim also warned agencies to ''make careful contractual arrangements'' to protect data stored by cloud providers.

''Otherwise, if the personal information held by the cloud service provider on the organisation's behalf is compromised, the organisation could be in breach of the Privacy Act," Mr Pilgrim said.