Water and nitrogen (N) interact to influence soil N cycling and plant N acquisition. We studied indices of soil N availability and acquisition by woody plant taxa with distinct nutritional specialisations along a north Australian rainfall gradient from monsoonal savanna (1,600–1,300 mm annual rainfall) to semi-arid woodland (600–250 mm). Aridity resulted in increased ‘openness’ of N cycling, indicated by increasing δ15Nsoil and nitrate:ammonium ratios, as plant communities transitioned from N to water limitation. In this context, we tested the hypothesis that δ15Nroot xylem sap provides a more direct measure of plant N acquisition than δ15Nfoliage. We found highly variable offsets between δ15Nfoliage and δ15Nroot xylem sap, both between taxa at a single site (1.3–3.4 ‰) and within taxa across sites (0.8–3.4 ‰). As a result, δ15Nfoliage overlapped between N-fixing Acacia and non-fixing Eucalyptus/Corymbia and could not be used to reliably identify biological N fixation (BNF). However, Acacia δ15Nroot xylem sap indicated a decline in BNF with aridity corroborated by absence of root nodules and increasing xylem sap nitrate concentrations and consistent with shifting resource limitation. Acacia dominance at arid sites may be attributed to flexibility in N acquisition rather than BNF capacity. δ15Nroot xylem sap showed no evidence of shifting N acquisition in non-mycorrhizal Hakea/Grevillea and indicated only minor shifts in Eucalyptus/Corymbia consistent with enrichment of δ15Nsoil and/or decreasing mycorrhizal colonisation with aridity. We propose that δ15Nroot xylem sap is a more direct indicator of N source than δ15Nfoliage, with calibration required before it could be applied to quantify BNF.