A Sydney man who police allege sympathises with the Islamic State terrorist group has been granted bail after facing court charged with possessing ammunition.

Omar Ammouche, 33, was arrested during a counter-terrorism raid on a share house at Greenacre earlier this month.

He is accused of possessing 50 shotgun shells in breach of a firearm prohibition order.

Ammouche's friend, Mohammed Faytrouni, who does have a firearms licence, told Sydney's Central Local Court that the ammunition belonged to him.

Police allege Ammouche sympathises with Islamic State - citing the discovery of a flag and clothing in a car during the raid.

The prosecutor told the court: "It is a matter of grave concern to the community."

Ammouche's lawyer said the items do not belong to his client and have been used by police to taint him.

Magistrate Les Mabbutt said it was not clear who owned the flag and in any event the accused is not charged with a terrorism offence.

"I cannot come to the view that that factor is one that I can take into account," he said.

The court heard Ammouche's phone calls have been monitored since September last year as part of an investigation into two Australians said to be fighting with Islamic State overseas.

The magistrate said at this point, the prosecution's case was not strong.

Ammouche's lawyer Adam Houda spoke to the media outside court.

"He was always going to get bail. I just needed a fair run," he said.

"The raising of the flag was always designed to do one thing and that is to poison the mind of the magistrate.

"The issues were ventilated in court and I'm sure that the case speaks for itself.

"The manner in which my client was arrested was completely appalling.

"He was assaulted. It was an unprovoked attack in front of his little children. His children were in tears at the time."

Ammouche is said to have been working as a welder prior to his arrest and is the sole bread winner for his wife and five children.

The case will return to court in March.