Monserrath Hidalgo, 46, is accused of stealing from Governor-General Quentin Bryce while she was having lunch at Perons Health Cafe on Bay Street, Double Bay on October 6.
Police facts tendered to Waverley Local Court on Tuesday said Ms Bryce had her handbag at her feet and Hidalgo, who was seated nearby, reached over and took it.
Ms Bryce noticed her bag was missing and informed police officers who were accompanying her.
When the officers approached Hidalgo, she produced the handbag from within her rolled-up cardigan, the facts allege.
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The governor-general then noticed that two $50 notes were missing from the bag.
Police searched Hidalgo and found two $50 notes wrapped up in her cardigan.
She was arrested and cautioned at Waverley police station where she made a full admission of the theft, the facts say.
The court was told Hidalgo had a long criminal history and suffered from anxiety.
Magistrate Jacqueline Milledge adjourned the case under the Mental Health Act until December 8.
