Four other men, including three already in custody, have also been charged over the alleged plans to target government buildings, including the Australian Federal Police offices in Sydney.
The 15-year-old teenager, who was arrested along with a 22-year-old man in counter-terrorism raids in Sydney's west on Thursday, was 14 when the alleged terror plot was devised last year, police allege.
Police say he and four other conspirators were involved in "formulating documents connected with preparations to facilitate, assist or engage a person to undertake a terrorist act".
If convicted of the terror charge, the teenage boy faces the prospect of life in prison.
At Parramatta Children's Court on Thursday, psychologist Hanan Dover told the court the teen had been traumatised by two previous raids and needed his family's ongoing support.
"The slight progress that we started to make, I think, would have come undone after today," she said.
"I have high concerns for his mental health if he is to remain in custody."
The teenager's defence lawyer Charles Waterstreet argued his client posed very little risk of reoffending and asked he be released on strict bail.
The boy's father meanwhile offered up $400,000 in surety and told the court he'd ensure his son reported daily to police if granted bail.
"Whatever happened to him before is rectified and he's no threat to anybody," the man said.
"We all want the best for him. We all stand by him."
But police prosector Bruce Wells said no bail conditions could mitigate the dangers to others.
"There is a risk. Further to that are concerns about self-harm," he said.
The family was not in a position to provide the level of protection that custody could offer, Mr Wells said.
Magistrate Elizabeth Ryan reserved her decision on the boy's bail until Friday morning.
NSW Police Deputy Commissioner Catherine Burn said it was disturbing to see teenage children in this environment.
"There's absolutely no doubt about the fact that we're charging a 15-year-old with a very, very serious offence - this is an offence that has a maximum of life imprisonment."
She said police had been working with the boy's school, Bass High.
"We don't know how the 15-year-old has got to the point where we will allege he got," she said.
"The principal and the executive of the Department of Education are aware of today's activities."
The teenager's 20-year-old co-accused Ibrahim Ghazzawy will face Campbelltown Local Court on Friday after a delay getting documents to court.
A 22-year-old man was scheduled to appear at Sydney's Central Local Court on Thursday afternoon while two other men aged 21 and 22 were remanded to face the same court on December 16.
Ms Burn said Thursday's arrests were not linked to last week's raids on two homes in Merrylands, including the Lockwood Street home of a man accused of supplying the gun that killed Mr Cheng.
Those raids followed reported Facebook threats made against Merrylands police station.
Talal Alameddine, 22, remains in police custody charged with supplying the gun to Jabar.
Jabar fatally shot Mr Cheng outside police headquarters in Parramatta on October 2 before the young gunman was killed in a subsequent shoot-out.
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