Prime Minister Tony Abbott says intelligence indicates people in Australia were allegedly planning a public beheading to be carried out in the name of militant group Islamic State.
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Mr Abbott's comments come as police say they have thwarted a "serious act of violence" after arresting 15 people and charging one in the wake of counter-terrorism raids across Sydney and Brisbane on Thursday.
Fairfax Media understands police will allege that the suspects were planning to snatch and behead a random member of the public, then drape them in the flag of Islamic State, also known as ISIL.
Mr Abbott, who is in Arnhem Land to fulfil an election pledge to spend a week in a remote community, said on Thursday that a senior member of Islamic State, who is an Australian, had urged supporters at home to carry out "demonstration killings" in Australia, according to intelligence reports.
The Prime Minister was asked about reports that there were plans to conduct public beheadings, and he responded: "That's the intelligence we received."
"Quite direct exhortations were coming from an Australian who is apparently quite senior in ISIL to networks in Australia to conduct demonstration killings here in this country," Mr Abbott told reporters. "So this is not just suspicion, this is intent."
Opposition Leader Bill Shorten said the allegations are "truly horrifying".
"These raids will no doubt come as a shock to many Australians, it's a development that reminds us all how close to home the threat of terrorism can be," he said.
Earlier on Thursday, NSW Police Commissioner Andrew Scipione refused to confirm the exact nature of the charges the suspect was facing but said details would be made clear when the person faced court in Sydney later that day.
"The violence was to be perpetrated on a member of the public on the streets and certainly at this stage was at a very high level," he told reporters in Sydney.
But Commissioner Scipione called for the public to remain "calm".
"We don't need to whip this up," he said. "All of those plans that may have been afoot have been thwarted. Today's operation reflects the reality of the threat we actually face."
Commissioner Scipione said it was "of serious concern" that there were people in the "heart of our community" planning attacks, but said "we have in fact disrupted that particular attack".
Eight hundred police raided properties and cars in the Sydney suburbs of Beecroft, Bellavista, Guildford, Merrylands, Northmead, Wentworthville, Marsfield, Westmead, Castle Hill, Revesby, Bass Hill and Regents Park in what authorities say is the largest counter-terrorism operation in Australia's history.
Police used 25 search warrants to carry out the raids, which were ongoing on Thursday, and said three people tried to resist arrest. A firearm was seized, but Commissioner Scipione said it was "too early" to assume that would be the only weapon gathered.
Seventy AFP officers were involved in raids in Brisbane butAFP acting assistant commissioner Andrew Colvin said they were not necessarily linked.
"So while the raids in Queensland are not directly related to what's happened here today in NSW, the investigations continue and we are looking at linkages between the two," Mr Colvin said.
But Mr Colvin said Thursday's raids were a "follow-up" to last week's arrests in Brisbane.
NSW police are launching a new operation, in which 200 police will be sent to areas where attacks may occur. "We won't be tolerating any misbehaviour on the streets," the NSW Police Commissioner warned.
Immigration Minister Scott Morrison said on Thursday that the scale of the operation "demonstrates the very real threat that's there, and the incredibly good work which is being done by the agencies".
He said the government was being strong in dealing with the threat both at home and abroad.
"I think this just demonstrates again that we are dealing with something that is very real here, the government knows that, we're responding accordingly," he said.
Last week the government raised the terror alert level to "high" meaning an attack is considered "likely".
The government said at the time they had detected no "particular plots".
But Mr Abbott said Friday's increase in the threat level was not directly linked to this weeks' raids. "The scale and the tempo of anti-terror investigations had been increasing for many, many, months so the decision that was made a week ago to raise the terror threat level was something that was many, many weeks, even months in the making," the prime minister said.
One of the men arrested in this morning's anti-terrorism raids in Sydney has appeared in court on a charge of conspiracy to commit a terrorist act.
Prosecutors allege that he was part of a plan to commit an act to "shock, horrify and terrify" the community. He was refused bail.
Omarjan Azari, 22, from Guildford in Sydney's west, appeared briefly in the dock before his barrister requested that he be taken back down to the cells.
Azari appeared in court wearing a dark fleece jumper.
Commonwealth Prosecutor Michael Allnutt told Central Local Court that the allegations against the accused were "very very serious" and involved "an unusual level of fanaticism" such that he could not be relied upon to "meet any court order".
He said that Mr Azari was part of a plan earlier this year to commit an "extremely serious offence" that was done "with the knowledge of police surveillance conducted at that time".
The court heard the evidence took the form of one intercepted phone call between May 8 and September 18 to which Mr Azari was a party.
Court documents show that Mr Azari is accused of conspriring with "Mohammad Baryalei and others to act in preparation or plan a terrorist act or acts".
Mr Allnutt said "there was a clear imperative to commit an act to shock, horrify and terrify the community as a whole".
The plan involved the "random selection of persons to rather gruesomely execute", he said.
He said Mr Azari had access to cash and the matter involved "an unusual level of fanaticism".
Mr Allnutt said the immediate catalyst for Mr Azari's arrest was a phone call that took place "only a couple of days ago".
"There's been an immediate reaction to a clear and imperative danger," he said.
This reaction was a reference to the raids across Sydney and Brisbane.
But the accused's barrister, Steven Boland, said "the allegation is based on one phone call of very limited compass that federal police have put forward".
Mr Boland, hired by Legal Aid NSW to represent Mr Azari did not apply for bail on behalf of his client, and bail was this automatically refused.
The matter will return to court in six weeks.