The soldiers, assigned to protect a visiting Australian official, opened fire on a vehicle as it left Abdel Falah al-Sudani's Baghdad compound on June 21.
Three other bodyguards and two civilian bystanders were wounded in the shooting, which has strained relations between Australia and Iraq.
The head of the Australian Defence Force, Air Chief Marshal Angus Houston, said the troops believed the civilian vehicle may have contained insurgents intent on a car bomb attack.
He said the vehicle had driven through a cordon established by Iraqi authorities to allow a number of Australian light armoured vehicles (ASLAVs) to move onto a road.
"This civilian vehicle continued towards the ASLAVs despite clear warning in English and Arabic displayed on the rear of the ASLAVs and repeated visual signals and shouted verbal warnings from both the Australian personnel and the Iraqi facility protective services providing support," he said.
"Despite these warnings the civilian vehicle moved alongside one of the ASLAVs. Believing the threat of an attack was imminent, Australian personnel fired at it until it no longer posed a threat."
Air Chief Marshal Houston said the shooting had been investigated by Australia's commander in the Middle East, Brigadier Mick Moon.
"This investigation found that our personnel acted in accordance with their rules of engagement," he said.
Mr Sudani demanded an explanation from the Australian government for what he called an "intentional and unwarranted criminal aggression against members of our protection force."