A former Australian special forces soldier who was charged with a war crime related to his deployment in Afghanistan has been granted bail, after a Sydney magistrate accepted he was in a potentially dangerous position in custody.

Oliver Schulz, 41, was arrested last week and is the first current or former Australian soldier to be charged with the offence.

The ABC understands the charge relates to the shooting death of Dad Mohammed in May 2012, in central Uruzgan province.

That killing was revealed by a joint ABC Four Corners and ABC Investigations report, which broadcast footage of the alleged shooting.

Magistrate Jennifer Atkinson today granted bail, finding there were exceptional circumstances in the case to justify the decision.

Mr Schulz appeared via audio-visual link and kept his eyes down as he learnt that he had received bail.

The bail conditions include a security deposit of $200,000, daily reporting to police, and a nightly curfew.

Mr Schulz is also prohibited from contacting any of his ex-colleagues who were on the same rotation in Afghanistan, including directly, indirectly or through social media.

"Your liberty is a result of me making risk assessments … you need to be very careful to do what I say," Magistrate Atkinson told Mr Schulz.

"Understood," Mr Schulz replied.

His barrister, Phillip Boulten SC, yesterday argued that his client was "extremely vulnerable" while in custody.

He told Sydney's Downing Centre Local Court that, wherever he was held, he was likely to have to mix with people who "sympathise with the Taliban or with other Islamic extremist groups".

"There is no getting around it. I'm afraid he is at risk of grave harm," Mr Boulten said.

Magistrate Atkinson accepted that the veteran found himself in a worse position than others while on remand.

"I do accept that he is in an onerous and difficult, and potentially dangerous, custodial environment," she said.

The magistrate said he would also have "significant difficulties" communicating with his legal team in custody, particularly given the case will involve a complex brief of evidence and national security issues.

"The unusual feature of this is the overlay of the national security matter," she said.

Magistrate Atkinson noted the prosecutor's submission that potential bail concerns included the risk of flight and interfering with witnesses or evidence, but said those were matters routinely dealt with under the bail act.

"His likely time in custody is unknown," she said.

"It's likely to be years rather than months before these criminal proceedings are concluded."

If found guilty, the 41-year-old veteran could face a maximum penalty of life imprisonment.

Mr Boulten yesterday said the man had known for years that he was under investigation and had not fled, nor taken any step to pressure potential witnesses or destroy evidence.

He had also asked for a non-publication order over his client's name, arguing he was a member of a "cohort" of the ADF that faces threats, to them and their families, even after they leave the army.

Barrister Joe Edwards, for the Department of Defence, neither supported nor opposed that application.

The matter did not meet a test of "necessity" to make the order, according to Mark Polden, who acted for the ABC.

Magistrate Atkinson declined to make the order.

The case returns to court on May 16.