"The ongoing violence in Iraq continues to have an impact on the Middle East community in Australia," ASIO says in its annual report to parliament, released today.
"During 2005, in the lead-up to the elections in Iraq, tensions increased between members of the Sunni and Shia communities in Sydney, particularly in the Auburn area" it said.
The agency said individuals in Australia continued to adhere to an extreme interpretation of Islam that advocated violence.
"Some of these are Australian-born and others have lived here for most of their lives. Some are associated with extremist groups and terrorist identities overseas and some have trained with terrorist groups in other countries," the report said.
"ASIO continued to investigate leads relating to individuals in Australia with links to overseas extremist and terrorist activity, including al-Qaeda and like-minded groups."
The spy group said the radicalisation of some individuals had been a very short process, making it hard for authorities to detect them.
The intelligence also warns that Jemaah Islamiah (JI) remains a serious threat to Australian interests here and overseas.
The agency warns the death of bomb-maker Azahari bin Husin in a police raid in 2005 did nothing to reduce the threat to Australian interests in Indonesia.
"Jemaah Islamiah has also formed strong alliances with elements of the Moro Islamic Liberation Front and the Abu Sayyaf group in the Philippines has also been involved in the Mindanao-based joint training programs," ASIO said.
ASIO touched on the theme of whether or not Australia's involvement in Iraq had made the nation a greater terrorist target, but concluded only that Australia was a target simply because it was part of the West.
"…fundamentally we are identified by them as a part of the West - a 'crusader' nation - which makes us their enemy and a legitimate target for attacks," it said.