Prime Minister Malcolm Turnbull said an investigation found Stuart Robert had breached the government's Code of Ministerial Standards through his 2014 trip to Beijing with a friend and donor to the ruling Liberal Party, Paul Marks.
Marks made the trip to seal a mining deal between his company Nimrod Resources and Chinese government-owned Minmetals.
Minmetals' website said Robert, then assistant defense minister, spoke at the signing ceremony on behalf of the Australian Defense Department. But under questioning this week, Robert said he went to China as a private citizen while on leave.
The opposition accused Robert of breaching a section of the code of conduct that states a minister must not assist any company or business except in an official capacity as a minister.
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Turnbull said Robert had discovered since the trip to China that he had shares in a company Metallum Holdings, which had an interest in Nimrod Resources.
"Mr. Robert recognized that this connection would create the impression that at the time he went to Beijing, he had something personally to gain from the Nimrod Resources project," Turnbull said in a statement.
The lawmakers initially kept them only because they thought the USD 28,000 timepieces were fake, the Herald Sun newspaper reported. But they returned the watches after discovering they were genuine.