In 1926, in the fictitious Australian outback town of Dungatar, 10-year-old schoolgirl Myrtle Dunnage is blamed. Twenty-five years later, in 1951, Myrtle, now a couturier-trained dressmaker called Tilly (Kate Winslet), returns to Dungatar. Tilly remembers nothing of Stewart's death, and her mentally ill mother Molly (Judy Davis), living in squalor, does not even remember her. At the local football final game, Tilly’s red couture gown distracts the Dungatar players. Teddy McSwiney (Liam Hemsworth) points this out, and she changes into an equally alluring black outfit before the last quarter. When the teams swap ends of the field, the men from Winyerp are the distracted ones, and Dungatar wins. Tilly agrees to make a dress for Gertrude Pratt (Sarah Snook) for the upcoming footballers dance, in exchange for the truth. Gertrude reveals that she told Stewart where Tilly was hiding that day. Molly tells the townswomen that Teddy died trying to prove that his love was stronger than their hate. Molly tends to the grieving Tilly, and tells her that Evan had Tilly sent away to hurt Molly. She encourages Tilly to use her art against the townspeople. Molly suffers a stroke and dies. While Tilly and Farrat hold a wake, Beulah snoops around the house. Tilly drunkenly objects to the music, and injures Beulah when she throws the record player off the verandah. Sergeant Farrat sends Beulah to a sanatorium in Melbourne. Percival Almanac (Barry Otto), the sadistic town chemist, drowns in a pond behind his house. His wife, Irma (Julia Blake), is under the influence of extra-strong hash brownies Molly baked to ease her arthritis pain. Sergeant Farrat takes the blame for the hashish and transvestism and is arrested. Tilly reveals the truth about Evan to his wife, Marigold. When he threatens to commit her, she cuts his Achilles tendons and leaves him to bleed to death. Meanwhile, at a competitive Eisteddfod in Winyerp, the townspeople discover that Tilly created Winyerp's charming Mikado costumes. Their own disordered production of Macbeth is doomed by the loss of Evan and Marigold. Declaring that she is no longer cursed, Tilly sets fire to her house and sends a paraffin-soaked bolt of red fabric rolling down the hill into town. The townspeople return to find Dungatar a ruin. Tilly is on the train, headed to Paris, via Melbourne.