The corporal used a doctor's scalpel to remove the right hands of two deceased alleged insurgents during a joint mission with the Australian Special Operations Task Group and Afghan national security service in the province of Zabul in 2013, according to the ABC.
A high-ranking insurgent who was dubbed 'Rapier' was the group's target, but he was not located and four alleged insurgents were killed during the mission.
It is understood the corporal made the decision to cut off the hands after searching the bodies and discovering a Makarov pistol concealed on one of them.
An AFP spokesperson confirmed their investigation was complete and the matter was now back with the ADF for further consideration.
"On 17 August 2015, the Australian Defence Force referred a matter to the AFP relating to an allegation a member of the Special Air Service Regiment removed the hands from deceased insurgents in Afghanistan," the spokesperson told SBS World News.
"As the matter is now with the Australian Defence Force, it would be inappropriate for the AFP to comment further."
A Department of Defence spokesperson told SBS World News the AFP had "formally advised Defence that its investigation into the matter is complete and it will take no further action".
While Australian soldiers do collect fingerprints and retina scans of dead Taliban fighters, the mutilation of dead bodies is prohibited under international law.
