Fireworks over Melbourne skyline and Yarra River during New Years Eve fireworks on December 31, 2013 in Melbourne, Australia.
The man had connections with extremists, but was believed to be acting alone.
The 20-year-old man was arrested on a street in Werribee just after 3pm on Monday.
The move comes after a man was arrested and accused of planning a New Year's Eve terror attack in Melbourne.
Victoria Police Deputy Commissioner Shane Patton, as reported by Daily Telegraph, said, "It is a tremendous concern to us that (during) festive season, when people are out enjoying themselves, that there is a potential plot to commit a terrorist act".
Authorities allege the man planned to shoot people with an automatic gun at Federation Square in the city centre.
That property is still being searched by police while his place of work, a computer business in Footscray, and a relative's home in Meadow Heights are no longer being searched after warrants were executed at those locations on Monday.
Ali had obtained an al-Qaeda manual online, with instructions for staging a terrorist attack, and was a sympathiser of the so-called Islamic State, said police.
There is no ongoing threat to the public, police said.
He is now being interrogated by police in relation to the crimes of Acts in Preparation to Commit a Terrorist Attack and Collecting Documents to Facilitate a Terrorist Act.
In September 2016, an Australian court sentenced teenager Sevdet Ramadan Besim to 10 years in prison for plotting another attack on Melbourne, at an Anzac Day parade, a commemoration of the First World War landings at Gallipoli.
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