Two men who attempted to smuggle an improvised explosive device (IED) onto an Etihad plane went on to hatch a separate plan to build a hydrogen sulphide bomb, police say.

Key points: Police allege they have disrupted two separate terror plots being masterminded by the same group

Police allege they have disrupted two separate terror plots being masterminded by the same group The first was to detonate an IED, to allegedly be planted on the brother of one of the accused, on an Etihad flight from Sydney on July 15

The first was to detonate an IED, to allegedly be planted on the brother of one of the accused, on an Etihad flight from Sydney on July 15 Their second alleged blueprint involved releasing a toxic "rotten egg gas" bomb

Australian Federal Police Deputy Commissioner Michael Phelan said Khaled Khayat and Mahmoud Khayat, charged on Thursday night with terror offences, had been planning "one of the most sophisticated terror plots attempted on Australian soil".

Police will allege the IED had been built under instructions from a senior Islamic State (IS) controller in Syria and was to be planted in the luggage of a brother of one of the accused on the Etihad flight out of Sydney on July 15. Police said the brother was not aware of the plan.

Police described the IED as a "high-end military-grade explosive". However, that attempt was aborted, and a second plan was then hatched to create a "chemical dispersion device".

Police search bins at a property on Sproule Street in Lakemba this week as part of the terror raids. ( ABC News: Jessica Kidd )

Four men were arrested as part of terror raids in Sydney last week. Khaled Khayat and Mahmoud Khayat have both been charged with two terrorism-related offences and were refused bail in Parramatta Local Court on Friday.

Another man was released mid-week, while a fourth man remains in custody.

Deputy Commissioner Phelan said components and precursor chemicals of the hydrogen sulphide bomb were located during searches on properties in Sydney over the last few days but the plot had now been "completely disrupted".

"Not only have we stopped the IED that was believed to go on the plane but we have also completely disrupted the intended chemical dispersion device," he said.

"We do believe that through the wonderful efforts not only of law enforcement but in particular our intelligence agencies that we have completely disrupted this plot."

IED 'was to be planted on brother'

Police said the plot to detonate an IED on the Etihad flight was directed by a senior IS controller, who organised for components to be sent to Australia via international air cargo from Turkey.

Deputy Commissioner Phelan said the plot began in April when one of the accused was put in contact with the controller via his brother, who is a senior member of the terrorist group in Syria.

Police said the alleged plot ringleader planned to smuggle the IED inside another brother's luggage.

Federal and State Police officers are seen at a crime scene in Surry Hills this week. ( AAP: Sam Mooy )

On July 15 one of the accused travelled to the airport with that brother, who checked in under his real name and boarded the Etihad flight.

However, the brother was allegedly completely unaware of the dangerous cargo his brother had planted on him.

"We will be alleging the person who was to carry the IED had no idea they were carrying an IED," he said.

Deputy Commissioner Phelan said "there is a little bit of conjecture as to why" the plan "didn't go ahead".

But he said the IED did not get past the layers of airport security.

Sorry, this video has expired ASIO and federal and state police are continuing to search properties at locations around Sydney.

'Rotten egg' bomb blueprint

Police allege that following the aborted attempt on July 15, the IED was disassembled by one of the accused.

It was then that one of the accused and the IS controller discussed how to create a chemical device.

Deputy Commissioner Phelan said the alleged attackers had precursor chemicals and some components for the hydrogen sulphide bomb, but there was no evidence the device was completed.

It will be alleged the group undertook some experiments, but there were no concrete plans for where and when to use it, although closed crowded spaces such as those typical on public transport were mentioned.

"We were a long way from having a functional device," he said.

Hydrogen sulphide, known as "rotten egg gas" is highly toxic, and often fatal for people exposed to it.

Police smashed a door at a Punchbowl unit block as part of their raids. ( ABC News: Jessica Kidd )

Authorities 'went in early'

Deputy Commissioner Phelan said as soon as intelligence came through, the suspects were placed under surveillance and "steps were taken to mitigate any threat".

It has been reported that Australian authorities were rushed into arresting the men by a British threat to issue a public travel warning about Australia.

Deputy Commissioner Phelan confirmed police "went in early on the Saturday" but declined to specify why the decision was made to execute the raids.

He said "every counterterrorism power" available to authorities was used to arrest, detain and charge the men.

AFP, ASIO and New South Wales Police conduct operations on Cleveland Street, Surry Hills. ( ABC News: Chloe Hart )

Authorities raided five properties around Sydney at the weekend and two properties are still being searched.

Deputy Commissioner Phelan said he was confident all elements of the original IED had been discovered and recovered.

Men denied bail

Khaled Khayat, 49, of Lakemba and Mahmoud Khayat, 32, of Punchbowl did not apply for bail during a brief hearing at Parramatta Local Court this morning, and it was formally refused.

Outside court, the pair's barrister Michael Coroneos said: "My clients are entitled to the presumption of innocence."

Federal Justice Minister Michael Keenan described the alleged plot as "serious". ( ABC News: Jacob Kagi )

The charges carry a maximum penalty of life in prison.

The case will return to court in November.

Speaking in Perth, Federal Justice Minister Michael Keenan said security at Australia's airports would be increased and the impacts of the alleged plot "could have been catastrophic".

"I understand that Australians will feel very unnerved about hearing this news and the police allege that we have been the target of a very serious ISIL plot," he said.

"But I do want to remind everyone that this is the 13th time, because of the excellence of our law enforcement agencies, that we have been able to stop a terrorist attack from occurring on Australian soil in the past three years."