Woody encroachment into grasslands is occurring across the world and is of concern to land managers. Studies of forest–grassland boundaries have informed models describing factors that govern tree establishment and the maintenance and origin of grassland ecosystems. Central to these models is the role of fire relative to ‘bottom up’ resources such as soil and the geological substrate in determining the extent of grassland and forest in the landscape. The view that human lit fires have shaped vegetation across the Australian continent has been bolstered by early 19th century observations of Aboriginal‐set fires in Tasmanian montane grasslands and the documented encroachment of trees into these grasslands in the 20th century. We examined the pattern of lateral encroachment of woolly tea‐tree (Leptospermum lanigerum (Sol. ex Aiton) Sm.) into these grasslands and used tree ring chronologies to investigate (i) past fire activity and (ii) how the geological substrate mediates growth rates of L. lanigerum. Changes in fire regimes inferred from L. lanigerum recruitment were corroborated by historical records. Encroachment (and increases in woody cover) of trees into grasslands was highest on granitic substances, although L. lanigerum growth rates were highest on basalt substrates, followed by conglomerate, granite and Mathinna sediments. Frequent burning up to the 1980s may have stymied the encroachment of trees in grasslands underlain by basalt. Growth rates decreased with increasing distance from the forest edge. This may be due to incremental changes in soil resources, grass competition and/or microclimate. The dynamics between grasslands and forests in montane Tasmania are consistent with tree growth–fire interaction models that highlight the interplay of edaphic factors, growth rates and fire history. Such complexity cautions against generalizations concerning the direct effects of landscape fire in shaping vegetation distribution across Australia.