Predicting changes in vegetation structure in fire-prone arid/semi-arid systems is fraught with uncertainty because the limiting factors to coexistence between grasses and woody plants are unknown. We investigated abiotic and biotic factors influencing boundaries and habitat membership in grassland ('Triodia' or 'spinifex' grassland)-shrubland ('Acacia aneura' or 'mulga' shrubland) mosaics in semi-arid central Australia. We used a field experiment to test for the effects of: (1) topographic relief (dune/swale habitat), (2) adult neighbour removal, and (3) soil type (sand/clay) on seedling survival in three shrub and two grass species in reciprocal field plantings. Our results showed that invasion of the shrubland (swale) by neighbouring grassland species is negated by abiotic limitations but competition limits shrubland invasion of the grassland (dune). All species from both habitats had significantly reduced survival in the grassland (dune) in the presence of the dominant grass ('Triodia') regardless of soil type or shade. Further, the removal of the dominant grass allowed the shrubland dominant ('A. aneura') to establish outside its usual range. Seedling growth and sexual maturation of the shrubland dominant ('A. aneura') was slow, implying that repeated fire creates an immaturity risk for this non sprouter in flammable grassland. By contrast, rapid growth and seed set in the grassland shrubs (facultative sprouters) provides a solution to fire exposure prior to reproductive onset. In terms of landscape dynamics, we argue that grass competition and fire effects are important constraints on shrubland patch expansion, but that their relative importance will vary spatially throughout the landscape because of spatial and temporal rainfall variability.