The UK Home Office has appealed against a High Court verdict in December that required the government to register him as a British citizen, something he is entitled to as his mother was born and raised in England.
The case was argued in London before Justices Pill, Rix and Hooper in the Court of Appeal at the Royal Courts of Justice.
A judgement is expected early next month, although it was open for both sides to appeal the verdict further to the House of Lords.
The Home Office accepted the right to citizenship of Hicks, who has been in US custody at Guantanamo Bay since 2002 awaiting military trial on charges from allegedly fighting alongside the Taliban in Afghanistan in 2001.
But the Home Office also indefinitely suspended registering the citizenship on the grounds he committed acts "seriously prejudicial to the vital interests of the United Kingdom".
The appeal hinges on the defence argument that it was impossible for Hicks or anyone to be disloyal or disaffected to the British crown at a time before becoming a citizen.
"If that is right, then I lose this appeal," Home Office barrister Philip Sales told the court. "That is what the argument is going to be about. We don't say Mr Hicks was disloyal, we say he was disaffected."
Hicks was seeking UK citizenship because the Foreign Office has freed nine British citizens, some of whom were dual citizens, from Guantanamo Bay, and would expect on precedent for them to do the same for him.
The Australian government had made no effort to free him, leaving his fate in the hands of the US military.