Australian Prime Minister Malcolm Turnbull denounced a photo showing an Australian army vehicle flying a swastika flag in Afghanistan.
He said that the "completely and utterly unacceptable" incident took place during a mission in 2007.
According to the military officials, the symbol of Nazism was up "briefly" before commanding officers intervened, adding that those involved had been cautioned.
It follows intense recent scrutiny of Australia's conduct in Afghanistan.
The photo of the 2007 incident caused anger after it was obtained by the Australian Broadcasting Corporation (ABC) on Thursday.
"It was wrong - absolutely wrong - and the commanders took action at the time," Mr Turnbull told reporters.
In a statement, the ADF said it rejected "as abhorrent everything this flag represents".