Tyler Jakovac, 18, is facing terrorism-related charges with police saying he supported and wanted to be involved in "a mass casualty event".
A joint investigation between the Australian Federal Police (AFP) and NSW Police began in August, culminating in the 18-year-old's arrest in Albury, in the country’s south, on Wednesday.
"The male we've arrested has an extreme right-wing ideology and is focused on neo-Nazi, white supremacist and antisemitic material," AFP Assistant Commissioner Counter Terrorism Scott Lee said.
The teenager allegedly used social media and apps to express support for extremist ideology.
Assistant Commissioner Lee said bomb-making instructions were shared online "which he has sought to provide to others as part of his activities to urge others to commit terrorist acts and violence against community members".
The decision to arrest the teen at his Albury home came after an "escalation of this male's behavior which continued right up to this morning", Assistant Commissioner Lee said.
"A couple of days ago what we observed was an escalation in the tone which went to a support of a mass casualty event, and potentially his involvement in that event," he said. "There was a post in the very early hours of this morning which actually expressed support for a previous mass casualty shooting that had occurred internationally."
Home Affairs Minister Peter Dutton has agreed to launch an inquiry into extremist movements in Australia. It follows calls from his Labor counterpart Kristina Keneally for a review of Australia's terrorism laws to ensure they are equipped to respond to the growing threat of right-wing extremism.
Parliament's Joint Committee on Intelligence and Security (PJCIS) will investigate the "motivations, objectives and capacity" for violence by extremist groups, including right-wing and Islamist groups.
The inquiry will report back with its findings in April 2021.
Ms Keneally thanked Mr Dutton for agreeing to refer the matter to the PJCIS, and said Parliament needs to examine if Australia's laws are fit to deal with the rise of violent right-wing extremist ideology.
"We know that for ASIO some 30-40 per cent of their counter-terrorism work is now on right-wing extremism," she said. "It's not a question whether our national security agencies have the interest or awareness of this threat, it’s whether or not they have the right tools at their disposal."