James Michael Waugh will be released from custody, but is to receive mental health treatment as an inpatient in Brisbane's Princess Alexandra Hospital.
The now 31-year-old is charged with taking steps to seek out firearms training in preparation for, or planning, a terrorist act on or about September 3, 2020.
He applied for bail in a Brisbane court on Tuesday after committal hearing proceedings were adjourned, with prosecutor Sarah Farnden saying the Crown was considering its position.
Waugh allegedly made threats towards the mental health nurse and referred to "unleashing pandemonium on the streets of Bundaberg" while alone in his car, Ms Farnden told the court.
The charge against him is based on an email to a firearms trainer in which Waugh asked about taking shooting lessons.
It is alleged the act was in preparation for a terrorist act against a backdrop of incidents and comments Waugh made about extreme religious ideology and a desire to travel overseas to engage in acts of religiously motivated violence, Brisbane magistrate Kyna Morice said.
She added it is also alleged Waugh expressed thoughts of violence towards others including beheading and slaughtering non-believers of Islamic religion and had obtained a sword as part of a plan - that included preparation to kill people - but was arrested before anything was done.
Defence barrister Ruth O'Gorman said Waugh's interest in weapons was not recent as he had been a reservist for about four years from 2014.
She argued for Waugh to be bailed, submitting the Crown's case was weak and he had been in custody for a long time.
He also had a defence under mental health laws available to him, according to a psychiatric report, Ms O'Gorman said.
Waugh was arrested on November 3, 2020, then "unarrested" but detained on an involuntary treatment order the following day.
He was arrested again the same month but held in a secure mental health facility until July this year.
Waugh, now in Brisbane Correctional Centre, experiences "auditory hallucinations" with voices swearing at and abusing him, but they no longer command him to do anything, the court heard.
Ms Farnden argued the change in Waugh's mental health condition may not be genuine as he chose how to present himself to his treating team, who may not be aware of the seriousness of the situation.
She said the crown case was circumstantial but not weak.
Ms Morice released Waugh on bail with numerous conditions including requiring him to stay at the Princess Alexandra Hospital for treatment and getting permission from prosecutors before moving.
The case against Waugh - previously worked as a journalist for The Queanbeyan Age - is set to return to Brisbane Magistrates Court on November 4.
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