Kelp forests in southeastern Australia form canopies that support complex understory assemblages. Predicted levels of climate change in this region are likely to impact the health and distribution of these forests, potentially resulting in large-scale reductions in canopy cover. This study determined the impacts of a permanent reduction in canopy cover of the dominant kelp in this region, Ecklonia radiata, on the structure of understory algal and sessile invertebrate community assemblages. Changes in assemblages were determined over 12 mo in 3 treatments: unmanipulated, 33% canopy reduction and 66% canopy reduction. Clearance treatments were maintained to simulate the predicted effects of long-term climate-driven canopy reduction. Thinning of E. radiata canopy (especially 66% loss) caused a shift towards a foliose algal-dominated understory, with an associated loss of sponges, bryozoans, and encrusting algae. Canopy loss homogenised existing patchiness in understory assemblages, and high recruitment of E. radiata occurred at both levels of thinning. A 66% reduction in kelp canopy increased understory community diversity, but did not affect species richness. Thus, changes to understory assemblages occurred in a density-dependent manner, with 66% canopy loss required to alter the structure of assemblages at the community scale. Changes at this scale were subtle but important (with stability attributed to a combination of biogeography and resistance to perturbation driven by high diversity), and indicate that partial loss of kelp canopy under future climate change scenarios will shift understory communities towards a foliose algal-dominated state, which has important implications for sessile invertebrates and potentially future recruitment of kelp.