Thousands of foreign IT consultants could find themselves out of pocket and asking for higher pay following an Australian Taxation Office (ATO) ruling last week. The move may see the scrapping of tax-free allowances for overseas contractors living away from home.

In a taxpayer alert last week, the ATO warned foreign nationals employed in Australia to be aware of "schemes offering tax-free salary paid as a so-called 'living away from home allowance'."

"Such arrangements are being promoted to overseas visitors on working holidays in Australia, including IT workers," Australia's Tax Commissioner Michael Carmody said.

"The arrangements involve special-purpose companies being established to act as intermediaries between labour hire firms and foreign nationals working in Australia."

Carmody said intermediaries were seeking to "re-characterise salary payments as living away from home allowance, and in some cases paying more than 40 per cent of salary in what is claimed to be tax-free allowance".

Such allowances were "illegal", he said, adding: "On the facts available, the allowance bears no relationship to additional living costs required [by overseas contractors] to perform their work."

A spokesman for the ATO would not specify who such intermediaries were, saying he could not provide any details on those organisations.

According to Australian professional associations for IT contractors, around 80 per cent of Australia's 5000 overseas tech professionals are eligible for tax-free allowances, as they lived away from home in order to carry out their work.

Meanwhile, the ATO said it did not know what proportion of overseas IT contractors used intermediaries to exploit additional tax loopholes. "We still haven't reached any conclusion on those issues -- all we've done is issued an alert," the spokesman said.

One systems administrator and contractor with a Sydney-based software firm opposed the ATO's stance, calling it "unfair".

He said if the ATO's assessment became law, it could be a "big" financial blow to both foreign and local IT contractors.

"[The ATO] idea is unsettling. The many costs associated with setting yourself up while away from home, ranging from accommodation, phone calls, work-related meal expenses and even work-related car expenses can be a real burden.

"If overseas contractors can no longer claim those things tax-free, and worse, if their employer doesn't reimburse those expenses, the person incurs those costs as personal expenses," he said.

However, the ATO stressed it was not about to change the law, but warning people of arrangements being made by intermediaries between labour hiring agencies and overseas nationals to re-jig salary payments as tax-exempt allowances.