A Sydney magistrate has refused to grant bail to former Auburn deputy mayor Salim Mehajer in the wake of allegations he staged a car crash to avoid appearing in court.

Police say the 31-year-old orchestrated a crash in the western Sydney suburb of Lidcombe last year which left him in hospital so he did not have to face trial for the alleged assault of a taxi driver.

His lawyer argued the case was weak, but Magistrate Jennifer Giles disagreed and said this case "strikes at the very core of the justice system".

At the time of the crash, Mr Mehajer was on his way to court to face charges over the alleged assault.

Mr Mehajer was arrested at his new home in Vaucluse on Tuesday and was charged with perverting the course of justice and conspiracy to defraud, after a police investigation into the crash.

A magistrate later deferred the decision on granting bail after a marathon hearing at Waverley local court.

Mr Mehajer spent last night in custody where he will remain.

The October 16 car crash between Mr Mehajer's Mercedes AMG and a Mitsubishi Outlander happened at the intersection of Nicholas and Delhi streets.

Magistrate says prosecution case 'damning'

Magistrate Giles slammed the defence argument, which suggested Mr Mehajer may have been the victim of an extortion attempt by the driver of the other car, a woman who has been charged with insurance fraud over the crash.

"The defence has theorised ... that this could have been an opportunistic shake down, that somehow on spec [the woman driving the other car] lay in wait for the defendant to materialise to damage her own car and tellingly admit fault on some mad idea that the defendant would feel obligated to pay for an accident she admitted she caused," she said.

Salim Mehajer (L) was arrested in Vaucluse by police officers on Tuesday. ( Supplied: NSW Police Force )

"When in fact, all the defendant was going to do, and all he did do, was get out of going to court and collect money on his allegedly over-insured car."

The court heard that nine days before the crash, Mr Mehajer insured the Mercedes for $156,780, which according to the police is about $60,000 more than the car is worth.

"I consider the strands of the prosecution case to be quite damning," Magistrate Giles said.

She also rejected the second grounds put forward by Mr Mehajer's lawyer Tom Hughes, which relate to the fact this will be the former councillor's first time in custody.

"That's always unfortunate for anyone ... although he has many trials to prepare for, what is alleged here and it is alleged quite compellingly I would argue strikes at the very core of the criminal justice system," she said.

Salim Mehajer became famous after an elaborate and public wedding in 2015. ( AAP: Dan Himbrechts )

Magistrate Giles went on to say bail conditions were always set on the expectation that a defendant "turn up to court on the allocated day and not attempt to manipulate the court dates".

"This appears to me to be a premeditated scheme to circumvent the criminal justice system, and that the defendant should now base this application [for bail] on the claim that if he's in custody it will delay the time it takes to reach the district court seems disingenuous to me," she said.

Outside the court, Mr Hughes said the magistrate had only made a ruling on this bail application, not the entire case.

"These are very early days, lets see what the evidence reveals," he said

Close friend also accused

One of Mr Mehajer's co-accused is his friend, 28-year-old Ahmed Jaghbir.

Reading from the police statement of facts, the Magistrate Giles said Mr Jaghbir told police "he attended a meeting early on October 16 where a plan and diagram of the proposed [collision] was presented".

"Mr Jaghbir says he's been instructed by the defendant to 'buy the accused more time' for his court case," she said.

Mr Hughes was asked whether the friendship between the men was over.

"I don't know Mr Jaghbir and I don't know anything about their friendship, if indeed there is one," he said.