The current study aimed to advance our understanding of the factors that influence mental health diversion in Local Courts in New South Wales, Australia. Logistic regression was used to systematically identify the factors that are correlated with diversion in a cohort of individuals (N = 7283) diagnosed with psychosis. Those with a substance-induced psychotic disorder were less likely to be diverted than those with an affective psychosis or schizophrenia, after adjusting for age, gender, Indigenous status, offence seriousness, violence and criminal history. Unexpectedly, those with psychotic disorders committing violent or serious offences were more likely to be diverted than those committing non-violent, less serious offences. Legal representation should be provided to all individuals with serious mental illnesses facing criminal charges. The State-wide Community and Court Liaison Service should be expanded to more Local Courts. Further research is required into why Aboriginal defendants with a psychotic illness are less likely to be diverted.