Set between 1939 and 1942 against the tumultuous backdrop of events across northern Australia at the time, such as the bombing of Darwin during World War II, this period romantic drama follows the fluctuating fortunes in the life of Lady Sarah Ashley travels from England to northern Australia to force her philandering husband to sell his faltering cattle station, Faraway Downs.
Her husband sends an independent cattle drover, called "Drover", to transport her to Faraway Downs. Lady Sarah's husband is murdered shortly before she arrives, and the authorities tell her that the killer is an Aboriginal elder, "King George". Meanwhile, cattle station manager Neil Fletcher is trying to gain control of Faraway Downs, so that Lesley 'King' Carney will have a complete cattle monopoly, giving him negotiating leverage with an Australian army officer, Captain Dutton, who wants to buy the cattle.
The childless Lady Sarah is captivated by the boy Nullah, who has an Aboriginal mother and a white father. Nullah tells her that he has seen her cattle being driven onto Carney's land — in other words, stolen from her. Because of this Fletcher mistreats Nullah and threatens him and his mother, so Lady Sarah fires Fletcher and decides to try to run the cattle station herself.
When Nullah and his mother hide from the authorities in a water tower, his mother drowns. Lady Sarah comforts Nullah by singing the song "Over the Rainbow" from the film The Wizard of Oz. Nullah tells her that "King George" is his grandfather, and that like the Wizard, he too is a "magic man".
Lady Sarah persuades Drover to take the cattle to Darwin for sale. Drover is friendly with the Aborigines, and therefore shunned by many of the other whites in the territory. It is revealed that he was married to an Aboriginal woman, who died after being refused medical treatment in a hospital because of her race. Lady Sarah also reveals she is unable to have children.
Drover leads a team of six other riders, including Lady Sarah, Drover's Aboriginal brother-in-law Magarri, Nullah, and the station's accountant Kipling Flynn, to drive the 1,500 cattle to Darwin. They encounter various obstacles along the way, including a fire set by Carney's men that scares the cattle, resulting in the death of Flynn when the group tries to stop the cattle from stampeding over a cliff.
Lady Sarah and Drover fall in love, and she gains a new appreciation for the Australian territory. The team drive the cattle through the dangerous Never Never desert. Then, when at last delivering the cattle in Darwin, the group has to race them onto the ship before Carney's cattle are loaded.
Afterwards, Lady Sarah, Nullah, and Drover live together happily at Faraway Downs for two years. Meanwhile, Fletcher kills Carney, marries his daughter Cath Carney, takes over Carney's cattle empire, and continues to menace Lady Sarah. It is established that Fletcher was the actual murderer of Lady Sarah's husband, and is also Nullah's father.
Nullah is drawn to go on a walkabout (a rite of passage) with his grandfather "King George", but is instead taken by the authorities and sent to live on Mission Island (a fictitious island, but inspired by Bathurst Island) with the other half-Aboriginal children (dubbed the "Stolen Generations"). Lady Sarah, who has come to regard Nullah as her adopted son, vows to rescue him.
Meanwhile, she works as a radio operator in Darwin during the escalation of World War II. When the Japanese attack the island and Darwin in 1942, Lady Sarah fears that Nullah has been killed.
Drover, who had quarrelled with Lady Sarah and left, returns to Darwin and hears (mistakenly) that she has been killed in the bombing. Drover learns of Nullah's abduction to Mission Island, and goes with Magarri and a young priest to rescue him and the other children. Meanwhile, Lady Sarah is about to evacuate, but when Drover and the children sail back into port at Darwin, and Nullah plays "Over the Rainbow" on his harmonica, Lady Sarah hears the music and the three are reunited.
Fletcher, distraught at the ruination of his plans and at the death of his wife killed during a Japanese air strike, attempts to shoot Nullah, but is speared by King George and falls dead. Lady Sarah, Drover, and Nullah return to the safety of remote Faraway Downs. There, King George calls for Nullah, who returns to the Outback with his grandfather.