Police arrested the 17 year-old from his home in southwest Sydney after he allegedly threatened to kill a police officer.
The New South Wales Joint Counter Terrorism Team allege the boy posted online threats, created an attack map and deleted hard drives in planning a terrorist act.
He's also alleged to have threatened to kill a police officer.
New South Wales Police Commissioner Andrew Scipione has defended the decision to charge the teen with terrorism offences despite his mental health condition.
"At the end of the day, my understanding is that it was the option that we were left with. We are always going to respond. You cannot afford not to respond, in fact we respond on every occasion."
Prime Minister Malcolm Turnbull has also stressed the importance of responding to such threats.
"We are relentlessly vigilant in defending Australians from terror and from threats to our security. It's of critical importance."
Police say the 17 year-old, who cannot be named for legal reasons, has no links to known criminals and is not linked to any terrorism organisation.
Mr Scipione would not comment on whether police knew the boy had special needs before the arrest.
The teen did not apply for bail so bail was formally refused.
He's facing two serious charges - of planning and preparing a terrorist act, and using a telecommunications network with intent to commit a serious offence.
If found guilty of preparing to commit a terrorist act, he could face up to life imprisonment.
Mr Scipione says police and security services are increasingly becoming targets of terrorism-related threats.
He says a warning has been issued to police officers nationwide.
The threat has been heightened by the recent Orlando mass shooting and the killing of a police officer and his wife in Paris.
"We watch what happens around the world and the dreadful attacks that happened in Paris and our condolences go out to our colleagues in France and particularly those who were affected by that dreadful attack on the police officer."
The arrest comes as a National Policing Summit is held in Sydney, probing counter-terror responses and gun laws.
At the summit Minister for Justice Michael Keenan drew attention to the international threat of terrorism, including the more than 100 Australians currently fighting in conflict zones in the Middle East.
"Around 190 people here have been investigated for providing support for those groups involved in the conflict."
He says the national security environment in Australia has deteriorated significantly but the country is at the frontline of tackling the evolving threat.
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