The rhizosphere influences nutrient dynamics in soil mainly by altering microbial activity. The objective of this study was to evaluate the rhizosphere effect on nitrogen transformation in Australian native vegetation in relation to nitrification potential (NP). Microbial activity, NP, and nitrifiers (ammonia-oxidising bacteria, AOB) were compared between rhizosphere and non-rhizosphere soils of several Australian native vegetation under field conditions. These parameters were also measured with increasing distance from the rhizosphere of selected plant species using plant growth experiments. To examine the persistence of nitrification inhibitory activity of rhizosphere soil on non-rhizosphere soil, the soils were mixed at various ratios and examined for NP and AOB populations. The rhizosphere soil from all native vegetation (29 species) had higher microbial activity than non-rhizosphere soil, whereas 13 species showed very low NP in the rhizosphere when compared with non-rhizosphere soil. Nitrification potential and AOB populations obtained in the soil mixture were lower than the predicted values, indicating the persistence of a nitrification inhibitory effect of the rhizosphere soils on non-rhizosphere soils. In plant growth experiments the microbial activity decreased with increasing distance from rhizosphere, whereas the opposite was observed for NP and AOB populations, indicating the selective inhibition of nitrification process in the rhizosphere of the Australian native plants Scaevola albida, Chrysocephalum semipapposum, and Enteropogon acicularis. Some Australian native plants inhibited nitrification in their rhizosphere. We propose future studies on these selected plant species by identifying and characterising the nitrification inhibiting compounds and also the potential of nitrification inhibition in reducing nitrogen losses through nitrate leaching and nitrous oxide emission.