AbstractTo accurately project future water availability under a drying climate, it is important to understand how precipitation is partitioned into other terrestrial water balance components, such as fluxes (evaporation, transpiration, runoff) and changes in storage (soil moisture, groundwater). Many studies have reported unexpected large runoff reductions during drought, particularly for multi‐year events, and some studies report a persistent change in partitioning even after the meteorological drought has ended. This study focused on understanding how actual evapotranspiration (AET) and change in subsurface storage (ΔS) respond to climate variability and change, examining Australia's Millennium Drought (MD, 1997–2009). The study initially conducted a catchment‐scale water balance analysis to investigate interactions between ΔS and AET. Then the water balance analysis was extended to regional scale to investigate ΔS using interpolated rainfall and discharge with remotely sensed AET. Lastly, we evaluated conceptual rainfall‐runoff model performance of two commonly used models against these water balance estimates. The evaluation of water‐balance‐derived ΔS against Gravity Recovery and Climate Experiment (GRACE) estimates shows a significant multiyear storage decline; however, with different rates. In contrast, AET rates (annualized) remained approximately constant before and during the MD, contrasting with some reports of evapotranspiration enhancement elsewhere. Overall, given AET remained approximately constant, drought‐induced precipitation reductions were partitioned into ΔS and streamflow. The employed conceptual rainfall‐runoff models failed to realistically represent AET during the MD, suggesting the need for improved conceptualization of processes. This study provides useful implications for explaining future hydrological changes if similar AET behavior is observed under a drying climate.