We examined, using data from the 2006 Victorian Child Health and Wellbeing Study (VCHWS), whether family functioning is associated with parental psychological distress and children's behavioural difficulties. The VCHWS was a statewide cross-sectional telephone survey to 5,000 randomly selected primary caregivers of 0- to 12-year-old children between October 2005 and March 2006. Only parents or guardians of children aged 4–12 years (n = 3,370) were included in this study. After adjusting for sociodemographic variables and ethnicity, parents or guardians scoring higher on the family functioning scale (i.e., from poorly functioning households) were at greater risk of psychological distress and had children with lower levels of prosocial behaviour and higher levels of behavioural difficulties relative to those from healthily functioning households. Mental health prevention programmes addressing child mental and conduct problems should consider the family environment and target those families functioning poorly.