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New evidence is emerging that semi-arid ecosystems dominate interannual variability (IAV) of the global carbon cycle, largely via fluctuating water availability associated with El Niño/Southern Oscillation. Recent evidence from global terrestrial biosphere modelling and satellite-based inversion of atmospheric CO₂ point to a large role of Australian ecosystems in global carbon cycle variability, including a large contribution from Australia to the record land sink of 2011. However the specific mechanisms governing this variability, and their bioclimatic distribution within Australia, have not been identified. Here we provide a regional assessment, based on best available observational data, of IAV in the Australian terrestrial carbon cycle and the role of Australia in the record land sink anomaly of 2011. We find that IAV in Australian net carbon uptake is dominated by semi-arid ecosystems in the east of the continent, whereas the 2011 anomaly was more uniformly spread across most of the continent. Further, and in contrast to global modelling results suggesting that IAV in Australian net carbon uptake is amplified by lags between production and decomposition, we find that, at continental scale, annual variations in production are dampened by annual variations in decomposition, with both fluxes responding positively to precipitation anomalies.