We assess the impact of improved ocean initial conditions for predicting El Nino-Southern Oscillation (ENSO) and Indian Ocean dipole (IOD) using the Bureau of Meteorology’s Predictive Ocean Atmosphere Model for Australia (POAMA) coupled seasonal prediction model for the period 1982–2006. The new ocean initial conditions are provided by an ensemble-based analysis system that assimilates subsurface temperatures and salinity and which is a clear improvement over the previous optimal interpolation system which used static error covariances and was univariate (temperature only). Hindcasts using the new ocean initial conditions have better skill at predicting sea surface temperature (SST) variations associated with ENSO than do the hindcasts initialized with the old ocean analyses. The improvement derives from better prediction of subsurface temperatures and the largest improvements come during ENSO–IOD neutral years. We show that improved prediction of the Nino3.4 SST index derives from improved initial depiction of the thermocline and halocline in the equatorial Pacific but as lead time increases the improved depiction of the initial salinity field in the western Pacific become more important. Improved ocean initial conditions do not translate into improved skill for predicting the IOD but we do see an improvement in the prediction of subsurface temperatures in the Indian Ocean (IO). This result reflects that the coupling between subsurface and surface temperature variations is weaker in the IO than in the Pacific, but coupled model errors may also be limiting predictive skill in the IO.