In 1939, Lady Sarah Ashley (Nicole Kidman) travels from England to northern Australia to force her philandering husband to sell his faltering Australian cattle station, Faraway Downs. Her husband is murdered shortly before she arrives, with suspicions that he was killed by an Aboriginal elder, "King George" (David Gulpilil). Cattle station manager Neil Fletcher (David Wenham) is trying to gain control of Faraway Downs, so that Lesley 'King' Carney (Bryan Brown) can have a complete cattle monopoly in the Northern Territory, which will give him negotiating leverage with an Australian army officer, Captain Dutton (Ben Mendelsohn).
The childless Lady Sarah is captivated by a young half-caste boy, Nullah, who was born to an Aboriginal mother and an unknown white father. When Lady Sarah sees Fletcher mistreating the Aborigines, she fires him and decides to try and run the station herself. She persuades her husband's drover (Hugh Jackman) — called simply "Drover" — to take the cattle to Darwin for sale. Drover, a white man, is friendly with the Aborigines, and therefore shunned by many of the other whites in the territory. It is revealed that he had married an Aboriginal woman, but she had died after being refused medical treatment in a local hospital because of her race.
Drover leads a team of six other riders, including Lady Sarah, Drover's Aboriginal brother-in-lawAustralia Movie 2 Magarri (David Ngoombujarra), Nullah, and the station's accountant Kipling Flynn (Jack Thompson), to drive the 1,500 cattle to Darwin. They encounter various obstacles along the way, including the death of Flynn. However, Lady Sarah and Drover develop a romance, and she gains a new appreciation for the Australian territory. After they successfully deliver the cattle, Lady Sarah, Nullah, and Drover live together happily for two years. However, Fletcher kills Carney and marries Carney's daughter Cath Carney, takes over his empire, and then continues to menace Lady Sarah. It is determined that Fletcher was the actual murderer of Lady Sarah's husband, and that Fletcher is also almost certainly the father of Nullah.
Nullah is drawn to perform a walkabout with his grandfather, the aboriginal elder "King George", but is instead captured by the authorities and sent to live with other half-caste children on Mission Island. Lady Sarah vows to rescue him, but first works as a radio operator during the escalating war. When the Japanese attack the island and Darwin in 1942, Lady Sarah fears that Nullah was killed, and Drover and Nullah hear (mistakenly) that Sarah was killed. The Drover rescues the children from the island, and when they sail back into port at Darwin, Nullah plays his harmonica with the tune of "Over the Rainbow" from the film The Wizard of Oz. Lady Sarah hears the music, and the three are reunited. Fletcher attempts to shoot Nullah but is speared by King George and falls dead. On the way back to Faraway Downs, King George calls for Nullah, his grandson, who returns to the outback with his grandfather.
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