Droughts are a recurrent and natural part of the Australian hydroclimate, with evidence of drought dating back thousands of years. However, our ability to monitor, attribute, forecast and manage drought is exposed as insufficient whenever a drought occurs. This paper summarises what is known about drought hazard, as opposed to the impacts of drought, in Australia and finds that, unlike other hydroclimatic hazards, we currently have very limited ability to tell when a drought will begin or end. Understanding, defining, monitoring, forecasting and managing drought is also complex due to the variety of temporal and spatial scales at which drought occurs and the diverse direct and indirect causes and consequences of drought. We argue that to improve understanding and management of drought, three key research challenges should be targeted: (1) defining and monitoring drought characteristics (i.e. frequency, start, duration, magnitude, and spatial extent) to remove confusion between drought causes, impacts and risks and better distinguish between drought, aridity, and water scarcity due to over-extractions; (2) documenting historical (instrumental and pre-instrumental) variation in drought to better understand baseline drought characteristics, enable more rigorous identification and attribution of drought events or trends, inform/evaluate hydrological and climate modelling activities and give insights into possible future drought scenarios; (3) improving the prediction and projection of drought characteristics with seasonal to multidecadal lead times and including more realistic modelling of the multiple factors that cause (or contribute to) drought so that the impacts of natural variability and anthropogenic climate change are accounted for and the reliability of long-term drought projections increases.