Police say the two 16-year-old suspects, who are not being named due to their age, were arrested in a suburb of Sydney on Wednesday. Two knives were seized during the operation.
A Federal Police spokesperson later confirmed to CNN that they have been linked to ISIS.
The pair were refused bail on Thursday and are due to appear before Parramatta Children's Court in Sydney later the same day.
"The fact we are putting two teenagers before the court on such serious charges reflects the ongoing threat we face. Fortunately, the excellent cooperation between State and Federal agencies has prevented a very disturbing crime," said Catherine Burn, the acting New South Wales Police Commissioner.
It's the latest in a string of terrorism related arrests in Australia.
In September, a 22-year-old was charged with committing a terrorist act and attempted murder after stabbing a man walking through a nature reserve "a number of times."
Earlier this year, New South Wales police arrested a 16-year-old boy in Sydney on suspicion of plotting a terror attack on an Anzac Day ceremony.
In 2014, self-styled cleric Man Haron Monis held several people hostage at a Sydney coffee shop, ultimately killing two of them.
Then-Prime Minister Tony Abbott described Monis as "a deeply disturbed individual (with) a long history of crime, a long history of mental instability and infatuation with extremism," adding that he "sought to cloak his actions with the symbolism of the (ISIS) death cult."