Beat the butter and the sugar in a small bowl with an electric mixer until pale and creamy. Add the egg, beat until just combined. Add the sifted flour; stir to combine.

Gently knead dough on a lightly floured surface until smooth. Divide dough into four even portions. Set two portions to one side.

Tint one portion of dough green; tint the second portion red. Shape dough portions into separate discs; wrap in plastic wrap. Refrigerate for 15 minutes or until firm.

Preheat oven to 180°C (160°C fan-forced). Line two oven trays with baking paper.

Roll one dough portion between two sheets of baking paper into a 15cm x 20cm rectangle. Repeat with remaining dough.

With one long side of plain dough facing you, place the red dough on top, leaving a 1cm border on the long end closest to you; starting at this end, and using the paper as a guide, roll up the dough to form a log. Wrap with plastic wrap; refrigerate for 30 minutes, or until firm.

Meanwhile, repeat with the remaining plain and green dough.

Using a small sharp knife, cut log into 1cm-thick slices; place on oven tray. Bake for 10 to 12 minutes or until lightly golden. Cool pinwheels on trays.

Mix icing sugar and water in a small bowl to form a smooth paste. Place the crushed candy canes on a small plate. Brush a little icing over edge of a biscuit, then roll edge in candy cane; repeat with remaining biscuits. Stand biscuits until set.