The brother of Australian Test cricketer Usman Khawaja is free on bail after a court heard he allegedly faked a terror plot to frame his love rival for the affections of a 21-year-old University of NSW colleague.

Arsalan Khawaja was arrested on Tuesday accused of framing Mohamed Kamer Nilar Nizamdeen with a bogus terror hit-list targeting then prime minister Malcolm Turnbull, former foreign minister Julie Bishop and landmarks including the Opera House.

His alleged scheme led Mr Nizamdeen to spend four weeks in prison at Goulburn Supermax.

The Daily Telegraph can reveal the supposed love affair between the woman and the Sri Lankan IT worker, who were Khawaja's colleagues at the University of NSW, was all in Khawaja's mind.

The woman has told police there was nothing between her and Mr Nizamdeen.

The shock twist in the case came as Usman Khawaja was in Adelaide preparing to take on India with the under-pressure Australia team in the first Test.

"I won't be saying much, guys. It is a matter for police to deal with. Out of respect for the process it'd be inappropriate for me to make any further comment," said the star, who was visibly emotional with his head in his hands at training yesterday.

Police will allege his older brother wrote the terror hit-list in a notebook and pretended to security guards at the university that he had found it, claiming it had been written by his colleague Mr Nizamdeen.

Mr Nizamdeen was charged with planning a terrorist attack before charges were dropped in October.

Police arrested Khawaja, 39, as he drove his blue Mustang in Parramatta yesterday morning. He appeared before Parramatta Local Court charged with attempting to pervert justice and forgery by making a false document.

Khawaja was granted bail after his father paid a $50,000 surety.

Magistrate Tim Keady banned Khawaja from contacting any witnesses or employees of the university's IT department and from going within 100m of the Kensington campus.

"There are a significant number of names of people who may be called as witnesses," he said.

Mr Nizamdeen, 26, spent four weeks behind bars in maximum security prison before handwriting experts concluded the list in the notebook was not made by him.

"The only evidence was the notebook, which was supposedly found by a colleague and was not in my possession at the time of discovery," he said.

Mr Nizamdeen said the notebook was "discovered in an office space on a different floor where I had not been working in for nearly a month".

On October 19 he was cleared of planning IS-inspired lone-wolf attacks.

A week earlier police searched the Khawaja family home at Westmead and questioned Arsalan Khawaja.

In September - when Mr Nizamdeen was freed on bail - his lawyer Moustafa Kheir told Central Local Court his client had been frank with detectives, even giving them "suggestions for further investigations".

Mr Nizamdeen returned to his native Sri Lanka to a hero's welcome and accused the Australian Federal Police of conducting an investigation that was "immature, unprofessional, irresponsible, embarrassing and biased".

Police yesterday said they would pay the legal fees of Mr Nizamdeen, who is suing police. "We feel very sorry for him and what has happened to him … (but) we had to act early at the time, given the threats contained in that notebook," Assistant Commissioner Mick Willing said.

"We regret the circumstances which led to him being charged and the time he subsequently spent in custody­."

And Australian Federal Police Assistant Commissioner Ian McCartney said he stands by the decision to arrest Mr Nizamdeen at the time, given the "serious threats to a number of high-profile politicians and iconic sites" in the notebook.