Two men were about to launch an imminent terror attack when they were arrested in a raid on a Sydney suburb, police have said.
Officers who swooped in Fairfield seized a home-made Islamic State (IS)-style flag, a machete and a hunting knife, raising fears of a possible beheading-style attack.
The men, aged 24 and 25, would have carried out the attack imminently if they had not been arrested that day, New South Wales deputy police commissioner Catherine Burn said.
A video seized in the raid showed one of the men making threats, though Ms Burn refused to say exactly what was said.
Australia's prime minister Tony Abbott later told parliament that the video depicted one of the suspects kneeling in front of the IS flag with the knife and machete while making a statement in Arabic.
Asked whether they were planning a beheading, Ms Burn replied: "We don't really know what act they were going to commit.
"What we are going to allege is consistent with the IS messaging. We believe that the men were potentially going to harm somebody, maybe even kill somebody, and potentially using one of the items that we identified and recovered yesterday, potentially a knife."
Police are trying to determine whether the men were in contact with anyone from the IS.
"Yesterday, our focus was to act on information that we received about something that was imminent," Ms Burn said. "We believe that we have stopped that threat from occurring. However, there are further investigations that now we will need to follow through."
Omar Al-Kutobi and Mohammad Kiad were charged with undertaking acts in preparation or planning for a terrorist act, which carries a maximum life sentence. Their lawyer did not apply for bail and it was formally refused during a brief court hearing today. Neither man appeared in the courtroom.
Police do not believe there is any link between the alleged plot and another that prompted a series of anti-terror raids in Sydney in September. One man arrested during those raids was charged with conspiring with an IS leader in Syria to behead a random person in Sydney.
Australia's government raised the country's terror warning level in September in response to the domestic threat posed by IS, which has threatened Australia in the past when its spokesman Abu Mohammed al-Adnani issued a message urging attacks abroad, specifically mentioning the country.
In December, Man Haron Monis, an Iranian-born, self-styled cleric with a long criminal history, took 18 people hostage inside a Sydney cafe. Among his demands was that he be delivered an IS flag. Investigators, however, have said it does not appear he had established any contact with the group.
Mr Abbott said he suspected the terror threat in Australia was going to only worsen.
"As we have seen again and again in recent times, the death cult is reaching out all around the world, including here in Australia," he told parliament. "There are people in this country who are susceptible to these indictments to extremism and even terrorism."
The government believes about 90 Australians are fighting alongside IS in Syria and Iraq, with another 140 supporting the group from home.
The proliferation of IS-style attack plots in countries such as Australia is not surprising because such plots are generally simple and low tech, which makes them harder to stop, said Clive Williams, a counter-terrorism expert at the Australian National University and a former military intelligence officer.
"To drive a car into a group of policemen takes no planning whatsoever," he said. "It's a lot different from what al Qaida was encouraging people to do, which was to do sophisticated bombings which would result in lots of casualties but took lots of preparation and organisation.
"There was a better chance of detecting them, but they were more dangerous - whereas these are less detectable but less dangerous."