Place the milk, water, oil, egg, salt, sugar, flour and yeast in the bowl of an electric mixer. Whisk on low until combined, then turn up to medium-high and beat for several minutes until the mixture is glutinous and shiny.
Leave to stand for one hour, or up to several hours in the fridge.
To cook the donuts, pour the oil to a depth of 10cm in a large saucepan and heat to 180 C, or until a cube of bread turns golden brown in 15 seconds. Use two soup spoons to shape a donut; one to scoop the mixture out of the bowl, one to scrape it into the hot oil. Test one doughnut to check the oil temperature is correct; it should be golden brown after about 2-3 minutes on each side. Fry in batches of 3 – 4 doughnuts to not crowd the pan. Gently flip using a fork and when cooked, remove with a slotted spoon. Drain on paper towel.
Toss the doughnuts in the cinnamon sugar and serve immediately.
NOTE: To make the cinnamon sugar, combine 2 teaspoons ground cinnamon with 1 cup caster sugar