In the first scandal to rock the Abbott government, Assistant Treasurer Arthur Sinodinos has stood down while his role in a business deal is probed by a corruption inquiry.

Senator Sinodinos, who was a right-hand man to former prime minister John Howard, told the Senate that he did not want the “sideshow” over his business dealings to distract from the important work of the government.

He has been dragged into a NSW Independent Commission Against Corruption (ICAC) inquiry into a huge business deal involving former state Labor powerbroker Eddie Obeid.

The inquiry has heard Senator Sinodinos – who in 2008 was NSW Liberal Party treasurer and a member of the board of Australian Water Holdings – stood to gain a $20 million windfall if the deal between the privately-held AWH and state-owned Sydney Water went through.

Senator Sinodinos will appear as a witness before the ICAC inquiry, but has steadfastly maintained his innocence.

Under sustained questioning in the House of Representatives, Prime Minister Tony Abbott largely deflected questions over the affair, saying that Senator Sinodinos had “always dealt honourably with me”. He denied that he had forced Senator Sinodinos to step aside.

“He made the decision and I have to say that it is in the best and most honourable Westminster traditions that he should do so,” Mr Abbott said. “He has stepped aside for the duration of this matter and that is why I am looking forward to his restoration to the ministry.”

Penny Wong led Labor’s attack. Picture: Getty

Mr Abbott refused to answer questions from Opposition Leader Bill Shorten over what he knew about Senator Sinodinos’ business dealings or whether he had ever discussed AWH with him.

Senator Wong said it appeared Senator Sinodinos could have been both “payer and payee” of the donations.

He confirmed that Senator Sinodinos would not receive ministerial pay or entitlements while he waited to appear before ICAC. In the meantime, his duties will be handled by Finance Minister Mathias Cormann.

The decision by Senator Sinodinos to stand down is a victory for Labor, which has stepped up its attack on him in recent days.

Senator Sinodinos told the Senate in February, 2013 that he played no role in awarding a contract between AWH and Sydney Water.

But Labor says revelations aired at the ICAC inquiry “fly in the face” of that statement. Senator Penny Wong said ICAC had correspondence between the then company director and Sydney Water, as well as evidence of a meeting he had called to discuss the matter in 2011.

Senator Sinodinos also told parliament in 2013 that donations by AWH to political parties were handled by the company and not himself.

However, ICAC heard that donations had been disguised and charged back to Sydney Water as administration costs, and that Senator Sinodinos was on the NSW Liberal Party executive at the time of the donations.

Senator Wong told parliament it appeared Senator Sinodinos could have been both “payer and payee” of the donations.

Labor believes Senator Sinodinos also needs to explain how, having become AWH chairman on November 3, 2010, he was not aware of a personal loan agreement entered into with the Obeid family a day later. Senator Sinodinos told parliament in 2013 he had not been aware of the agreement at the time.

The opposition and the Australian Greens on Wednesday moved a motion in the upper house demanding the embattled senator appear before the chamber by midday to clarify his statement. 

John Howard andArthur Sinodinos. Photo: AAP

John Howard voices support

Former prime minister John Howard has backed embattled Liberal senator Arthur Sinodinos as a man of great integrity.

“Arthur Sinodinos is a man of great integrity and ability,” Mr Howard said in a statement regarding his former chief-of-staff, adding he continued to hold him in the highest regard.

“As he has indicated that he will answer questions at the ICAC inquiry it is not appropriate that I comment on the substance of the matter.”

Opposition calls for explanation

Opposition Senate Leader Penny Wong said the assistant treasurer had been given the opportunity to address “inconsistencies” about his “carefully-crafted” explanation.

“He has chosen not to,” she told the chamber.

Government senators responded angrily, saying there were no allegations against Senator Sinodinos and Labor was simply trying to smear his name without any evidence.

“They should put up or shut up before they smear the reputation of a man who is a greater Australian than any of them,” Attorney-General George Brandis said.

Government leader Eric Abetz said Labor’s “disgraceful” attack was simply an attempt to delay a vote on the repeal of the carbon and mining taxes before the West Australian senate election re-run.

The Greens backed the motion, saying if Senator Sinodinos had nothing to hide he should come before the Senate to explain himself.

WITH AAP