He was arrested in December following a NSW joint counter terrorism investigation into a report of someone posting violent extremist threats online.
The teen was initially charged with weapons offences after officers allegedly found a gel blaster and a flick knife when raiding a home in Sydney's inner west.
But five terror charges were laid after a review of his electronic devices allegedly identified violent extremist material and information that could help enact a terrorism act.
The teen allegedly created a document called "Terror Plan" after engaging in an online chat group named for a misanthropic organisation that advocates for violence.
The teen told police he had discussed the terror acts for "online notoriety" which shows he had no intention of acting on them, his lawyer told a NSW Children's Court on Wednesday.
"These statements were made for attention in the attention-seeking atmosphere of online chatrooms," he said.
He emphasised his client's mental health struggles and his need for support as compelling reasons as to why he should be granted bail under strict conditions.
Yet the prosecutor argued the best interests of the 16-year-old were subordinate to the paramount concern of the safety of the community.
He alleged the teen had flouted his bail conditions by continuing to access violent extremist material on his phone.
The 16-year-old allegedly participated in plans for a terror incident earlier this year that didn't eventuate, the court was told.
A terror attack doesn't need to be enacted to satisfy the elements of the charges, the prosecutor submitted.
"In the interest of community safety, Your Honour should not grant bail," he said.
The 16-year-old is accused of downloading concerning material related to knife attacks and mass casualty events, Judge Keisha Hopgood noted.
Saving that material to his personal devices "doesn't have the flavour" of seeking attention from others as argued, she said.
The judge accepted the teen is engaging with help after suffering significant deprivation throughout his childhood, but declined to grant bail.
"These matters are of the utmost seriousness and give the court serious concern," she said.
The 16-year-old will return to court later in April.
He is facing seven charges, including two counts of making documents likely to facilitate a terror attack and two counts of possessing violent extremist material.
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