Two teenagers have been charged with preparing to commit a terrorist act and belonging to a terrorist organisation after they were arrested on Wednesday in Sydney's southwest, where they were allegedly preparing to behead someone.
Around midday on Wednesday police arrested the 16-year-olds in a laneway behind a Bankstown mosque.
That morning the friends had bought two bayonets at a gun shop, police allege.
They were allegedly carrying handwritten notes that declared allegiance to Islamic State to be read out during the beheading.
One of the boys is the step-son of a convicted terrorist, the Daily Telegraph has reported.
His reputation as a radicalised teenager was reportedly known to counter-terrorism police after he refused to stand for the national anthem at his school last year.
His family home was raided during the September 2014 Operation Appleby raids, the largest ever counter-terror probe in Australia.
NSW Police acting commissioner Catherine Burn said counter-terrorism officers believed an attack had been imminent.
"We will be alleging this attack was inspired by Islamic State," Burn said.
"The events of yesterday are extremely sobering for all of us, particularly given the age of these individuals."
Burn confirmed police had conducted searches on a "number of homes" as well as a prayer hall.
“Had we not been in the right place at the right time... certainly somebody, potentially today... would be without their life,” AFP deputy commissioner Michael Phelan said.
The pair will appear in Parramatta Children's Court on Thursday afternoon.