Foreign Minister Julie Bishop issued a statement identifying the victim as a 34-year-old Australian man.
Ms Bishop said at a press conference that the man's death was not related to Baghdad's broader security environment.
She refused to confirm reports the man was shot dead, saying only that the Australian government was investigating the shooting.
Ms Bishop's statement said the man worked for Unity Resources Group, which provides security for Australian diplomats.
Headquartered in the United Arab Emirates, the private military group employs former soldiers from the British and Australian SAS forces.
The government statement  added that the embassy in Baghdad maintained an increased level of security
A security contractor has been killed outside the Australian embassy in the Iraqi capital, Baghdad, officials say.