Immigrants' mental health is a growing public health concern. Neighbourhood characteristics in the host society may contribute to the poor mental health observed among immigrants. In this study, we aimed to investigate the association between neighbourhood-level social fragmentation and socioeconomic characteristics with psychological distress among immigrants and non-immigrants living in Australia. We conducted cross-sectional secondary data analysis of 228,039 participants from the Sax Institute's 45 and Up Study, with psychological distress measured with the Kessler 10 (K10) and area-level social fragmentation and economic advantage/disadvantage measured at the statistical area level 1 (areas containing approximately 400 people). Multilevel logistic models were used to examine the extent to which differences across the least and most fragmented and economic advantage/disadvantage neighbourhoods contributed to the prevalence of high psychological distress (K10 score ⩾ 22). Immigrants accounted for about 23% of the sample. Slightly more immigrants (34.8%) compared to non-immigrants (32.9%) lived in fragmented areas. Although immigrants were over represented in areas with socioeconomic advantage (40% vs 33.9%), the prevalence of high psychological distress in neighbourhoods with higher social fragmentation and socioeconomic disadvantage was higher in immigrants than non-immigrants. Immigrants had 17% (95% confidence interval = [12%, 22%]) higher odds of having high psychological distress compared to non-immigrants. There was no evidence of an interaction between social fragmentation or socioeconomic disadvantage and immigrant status. Living in fragmented or socioeconomically disadvantaged areas was associated with higher psychological distress among immigrants and non-immigrants. English as a second language and low annual income were significant predictors of psychological distress in immigrants over and above area-level characteristics. Immigrants are vulnerable to mental health issues, but the characteristics of the area they live in are also important. Helping immigrants settle into well-integrated and economically advantaged areas may decrease the possibility of mental health issues.