Australian Federal Police Commissioner Michael Phelan said Khaled Khayat was allegedly accompanied by his brother to Sydney Airport knowing his luggage contained the explosive.
However, the luggage never made it onto the plane, and instead was taken from the airport by Khayat, according to Phelan.
"There is a little bit of conjecture as to why it didn't go ahead," he told reporters on Friday. "It did not get through security."
Khayat's brother is still overseas, unaware he was to carry an IED (improvised explosive device), Phelan said.
Khayat, 49, of Lakemba and another brother, Mahmoud Khayat, 32, of Punchbowl have each been charged with two counts of acting in preparation for, or planning, a terrorist act.
Their lawyer, Michael Coroneos, said his clients were "entitled to the presumption of innocence".
"Once the brief of evidence is served we can assess their legal position," Coroneos told reporters outside court.
Both men were refused bail ahead of another hearing on November 14. They face a maximum penalty of life in prison.
A third man also remains behind bars held under special anti-terror laws.
Phelan said the aborted July 15 plot involved a high-end explosive being concealed in a meat grinder.
"This is one of the most sophisticated plots that has ever been attempted on Australian soil," the deputy commissioner said.
"If it hadn't been for the great work of our intelligence agencies and law enforcement over a very quick period of time then we could very well have had a catastrophic event in this country."
It is believed the men came up with the plot after being put in touch with an ISIS controller in Syria.
Sydney terror plot: what we know
Who?
• Two men have been charged - Khaled Mahmoud Khayat, 49, and Mahmoud Khayat, 32.
• Another man is still being detained and a fourth was released on Tuesday night without charge.
• Police allege one of the charged men began communicating with an Islamic State "controller" overseas in April.
• The brother of one is a senior member of IS in Syria and acted as a go-between.
What is alleged?
• Bomb components were sent from Turkey to Sydney by air cargo with the IED assembled here.
• Khaled Mahmoud Khayat accompanied an unnamed brother to Sydney's international airport on July 15 with the bomb in his sibling's luggage. The brother had "no idea" about the plot.
• For an unknown reason Khayat left the airport with the bomb and his brother flew to Abu Dhabi on an uneventful Etihad flight.
• Following the aborted effort the bomb was disassembled.
• The IS controller then instructed the accused how to create an "improvised chemical dispersion device" designed to release the highly toxic gas hydrogen sulfide.
• Hydrogen sulfide is a colourless, poisonous and flammable gas that can damage lungs and affect breathing.
• The men created some components of the chemical bomb but remained "a mile-and-a-half from having a functioning chemical dispersion device".
• Police said there was no indication the chemical device was intended to be used on a plane.
Key dates
• Australian authorities receive information about the plot on July 26.
• It leads to raids across four Sydney suburbs on July 29 and the arrest of the four men.
• Khaled Mahmoud Khayat and Mahmoud Khayat face court on August 4 when their case is adjourned to November 14.
Source: AAP
