The Gillard government might have been rounding out a year of achievement with the Abbott opposition in retreat, but instead goes into the last week of Parliament facing its greatest crisis.

Its asylum seeker policy is in disarray, but that is not an existential threat to the government. The grave and immediate danger to Labor's hold on power is the fast-building crisis over the Prime Minister's connections to a major union fraud case from 1991 to 1995.

The government's success this week in winning support for a plan to save the Murray-Darling river system is a signal moment for Australia, but it was given scant chance to celebrate.

The waters of the Murray-Darling supply the farms that grow 40 per cent of Australia's food yet the river has been slowly dying during a century of paralysing political argument.

The dispute between the states over their conflicting claims on the river system were first put on the federation agenda before Australia existed as a political entity.

The argument that started in 1897 was finally overcome by the federal Environment Minister, Tony Burke, on Thursday in an impressive piece of political management and environmental redemption. Parochialism lives, of course, and the states are not all happy.

But the main elements of Burke's plan seem set to survive the states' objections and are now law. The plan, at a cost of $11 billion to taxpayers, will return at least 2750 billion litres of surface water to the river by 2019 to restore some of its health. It could be as much as 3200 billion litres depending on smarter water use.

"Today, under the Gillard government, Australia - a century late, but hopefully just in time - has its first Murray-Darling Basin Plan," Burke declared.

The Greens, arguing that the river needs yet more water for full restoration, are threatening to move a disallowance motion in the Parliament to kill the plan.

But Burke says that practical constraints - bridges, roads, land titles - limit the amount that the river can reasonably absorb. And the Greens are irrelevant so long as the opposition and government concur. And it appears they do.

But at Burke's appearance at the National Press Club to announce the deal, he had to answer questions about two scandals with which he has no personal involvement.

He was asked about the ICAC inquiry into corruption in the former Labor government of NSW, and Julia Gillard's connections to fraud at the Australian Workers Union in the early 1990s. The questions were not relevant but not unreasonable, and they hint at the difficulty the government will face trying to tell its story as the political system turns its attention more fully to the AWU scandal.

Burke might get a chance to add another environmental accomplishment next week, with an apparent agreement to end the long-running argument over Tasmania's forests.

The loggers, the conservationists and the Tasmanian government seem ready to travel to Canberra to sign an agreement that achieves Burke's demands - balancing preservation of half a million hectares of the island's magnificent native forests with the existence of a viable logging industry.

"This is a historic moment," said Tasmania's Premier, Lara Giddings, on Thursday. "After 30 years of division, we have the opportunity to work together towards a common goal."

If the deal can survive Tasmania's Parliament it will go to Burke for his signature, but, even if it does, news of this achievement is likely to be overwhelmed by the political contest in the House.

The AWU affair is now politically unmanageable for Gillard because there is no single point of origin. After a slow, early trickle the flow of new material is now spilling out from multiple sources and is being reported in all mainstream media.

Police forces in two states, Western Australia and Victoria, are considering reopening investigations into the fraud carried out by Gillard's then boyfriend, Bruce Wilson, when he was the secretary of the Victorian branch of the Australian Workers Union, as the new material accumulates.

A prime minister's office can be an intimidating edifice, and Gillard has relied on it in her approach of trying to tough out the scandal and limit media coverage.

She called a press conference to address the matter in August and declared the case closed and all questions answered. She has denied any wrongdoing and demanded that her accusers state any allegation against her, an invitation to commit defamation and risk the consequences.

But the opposition, while it's been slow to take up the matter, is now determined to use the four remaining parliamentary sitting days of 2012 to mount a concentrated challenge to Gillard's credibility and integrity over her connection to Wilson and his $400,000 fraud.

And anything stated in Parliament cannot be subject of defamation proceedings because of parliamentary privilege.

The Deputy Opposition Leader, Julie Bishop, is set to lead the inquisition. This will pit Australia's two most senior female politicians against each other, both trained lawyers, both hardened political infighters, in a contest that will play to the gallery of public opinion but, ultimately, to an audience of just two or three people - the independents who keep Labor in power.

Could this really be a greater threat than Kevin Rudd's challenge for the leadership in February? Yes, because while Rudd's failed bid threatened Gillard's prime ministership it did not necessarily endanger Labor's grasp of power.

That was a civil war in Labor. This is an affair that, depending on what emerges and how Gillard responds, could lead the opposition to move a motion of no confidence in the prime minister.

She could survive only with the support of Tony Windsor, Rob Oakeshott and Andrew Wilkie. None of these three is a fan of Tony Abbott, and all would prefer to keep Gillard in place. But there is a limit to what they can tolerate politically. Each has to answer to his electorate, not to Labor HQ.

Even one of Gillard's cabinet ministers and a mainstay of her caucus support, Bill Shorten, distanced himself from his leader over the scandal this week. Shorten was asked on Lateline about the "slush fund" Gillard had set up for her then boyfriend in the time she worked as a partner of the law firm Slater and Gordon in the early 1990s.

Why ask Shorten? Apart from being the Minister for Industrial Relations, Shorten knows quite a bit about the affair. He was the man brought in to lead the union after the Wilson scam had been disclosed and the AWU leadership purged.

Gillard has admitted, years ago, that she helped Wilson with the legal work to create what was euphemistically called the Workplace Reform Association.

She has described it as a "slush fund" for union officials. Wilson and his cronies persuaded various companies to donate money to the fund. Wilson then helped himself to it.

Asked about this fund this week, Shorten said: "Well, that account was unauthorised by the union and was an inappropriate account that account as far as I can tell. So that was out of bounds.

"When that account came to light, what I do know is that the union took action. I know that the union leadership of the day reported it to the police. In terms of the Prime Minister's explanations, I am satisfied with them."

So while he did not challenge the Prime Minister's version of events, neither did he mount a rousing defence of her. The political significance of this was not lost on Gillard's caucus, which is increasingly uneasy about the matter.

There is much detail but three central questions that Gillard will need to answer next week. Gillard has said she had no knowledge that Wilson stole the money and used some of it to buy a house in the Melbourne suburb of Fitzroy.

She has said that she broke off her relationship with him in 1995 as soon as she realised his deceit. She was young and naive, she has said. Specifically, she has said she was not involved in helping with the mortgage or the conveyancing work to help Wilson buy the house.

But there is new material suggesting that she was involved with the mortgage. "There is absolutely no doubt that Ms Gillard not only knew of the Slater and Gordon mortgage in March of 1993, but was specifically involved in taking steps to facilitate that mortgage," a former colleague and legal partner of Gillard's at Slater and Gordon, Nick Styant-Browne, told the ABC's 7.30 on Thursday night, saying he had documents to show this.

And Fairfax Media's Mark Baker reported yesterday that the Commonwealth Bank sent a letter to Ms Gillard on March 22, 1993, addressed ''Attention: Julia Gillard,'' confirming that the mortgage had been insured.

On the same day, a handwritten note in the Slater and Gordon conveyancing file on the property was headed "Bruce Wilson," noted the bank letter confirming mortgage insurance, and added: "Ralph spoke to Julia Gillard."

Who's Ralph? That's Ralph Blewitt, the bagman for Wilson, who handled the money and bought the house for Wilson so it wouldn't appear in Wilson's name. After 15 years in self-imposed exile in Malaysia to avoid prosecution, Blewitt returned to Australia this week.

He spoke to Victoria Police yesterday, offering to give evidence in the matter if he were granted immunity from prosecution.

So the opposition's first central theme will be to demand to know what did Gillard know about the conveyancing and how much was she involved in the house-buying transaction? Did she know the source of all the funds?

Its second central theme will be to demand to know whether she received any personal benefit?

And third, the opposition will take up Gillard's account of events in which she discovered in 1995 that she had been deceived by her conman boyfriend.

Why didn't she report her discovery to the AWU, or the police, or help recover the money, the opposition will want to know?

The questions next week will overshadow any good news of the government's achievements. And its very existence could depend on the quality of her answers.

Knives Are Out For Gillard