In 1926, in the fictitious outback town of Dungatar, 10-year-old schoolgirl Myrtle Dunnage is blamed for the death of classmate Stewart Pettyman and sent away by police Sergeant Horatio Farrat.
25 years later, in 1951, Myrtle, now a couturier-trained dressmaker called Tilly, returns to Dungatar. Tilly remembers nothing of Stewart's death, and her mentally ill mother Molly, 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 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 for the upcoming footballers dance, in exchange for the truth. Gertrude reveals that she told Stewart where Tilly was hiding that day.
At the dance, a transformed Gertrude captures the attention of William Beaumont, and they later become engaged. Impressed, the town's women commission extravagant dresses from Tilly, and Teddy pursues a romantic relationship with her.
Sergeant Farrat confesses to Tilly that Stewart's father, Evan, a town councillor, blackmailed him for secretly being a cross-dresser. Tilly and Farrat bond over their shared passion for designer clothing. Evan recruits incompetent Una Pleasance to start a rival dressmaking service, but when Gertrude hires Tilly to create her wedding dress, the townspeople return to Tilly.
Bribed with a boa, Farrat lets Tilly read the witness statement given by her former schoolteacher, Beulah Harridiene. She confronts Beulah, who admits that she was not even there. Tilly tells Farrat this at Gertrude's wedding reception, but he remains reluctantly convinced that Tilly killed Stewart. Everyone else had an alibi. He also reveals that Evan is Tilly's father. Tilly runs away, and Teddy follows after soothing his developmentally disabled brother, Barney, who screams hysterically that Tilly "moved" when Stewart died.
At the schoolhouse, Teddy helps her to remember how Stewart died. He threatened to murder her mother if she did not stand against a wall. He charged head-down at her, but she moved aside and Stewart broke his neck. Barney witnessed this from the town silo, but was afraid people would think he was lying. Tilly and Teddy make love in his caravan and plan to marry. They sit atop the silo, and Teddy shows that he does not believe in her curse by jumping inside. He sinks into sorghum grain and asphyxiates.
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, the sadistic town chemist, drowns in a pond behind his house. His wife, Irma, 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.
