He was jailed for up to 10 years in May this year over the terrifying plot, but with time served could be free on parole in as little as four-and-a-half years.

Prosecutors say that's not long enough, and have appealed to Victoria's highest court to impose a longer sentence.

"He planned to open fire into the crowd in Federation Square on the stroke of midnight, before taking hostages in a neighbouring bar, where he contemplated making one of them hold the Islamic State flag up to a window," prosecutor Pat Bourke said in submissions to the Court of Appeal.

"The level of fear and horror such an event would have created is difficult to estimate."

Mr Bourke described the sentence, handed down by Supreme Court Justice John Champion in May this year, as "unduly lenient".

Ali was ordered to serve at least seven years and three months, making him eligible for release as early as May 2025.

He is the brother of Hassan Khalif Shire Ali, who was shot dead by police in Bourke Street in 2018 after the fatal stabbing of Pellegrini's Espresso Bar owner Sisto Malaspina in an Islamic State-inspired attack.

Prosecutors have compared Ali's sentence to that handed down for others convicted of terror offences in Victoria.

Ali had been planning the attack since 2016 and, before settling on a shooting attack, had considered using a bomb, car or knives to kill.

His barrister Dermot Dann said Justice Champion had been conscious of the very serious nature of Ali's offending, including expressly noting his plans to kill up to 200 people.

He said the judge had described the offending as unequivocally horrifying in its potential savagery.

But the judge also took into account the fact Ali was 20 at the time he planned the attack and 23 at sentencing.

A unique aspect in the case was the death of his brother while he was in custody, Mr Dann said.

"Not only has that meant that the respondent's initial period in custody was particularly burdensome - it seems that the death of his brother had led the respondent to develop a hatred of ISIS," he said.

Prosecutors conceded the judge had accepted Ali's renunciation of Islamic State as genuine, and a significant step toward his rehabilitation.

Appeal court President Chris Maxwell and Justices Stephen McLeish and Mark Weinberg will hand down their decision at a later date.

Australian Associated Press