Pasture cropping is a farming system in which annual crops are sown into established perennial pastures. It may provide environmental benefits such as increased groundcover and reduced deep drainage, while allowing traditional crop production in the Mediterranean-style climate of south-western Australia. In this research, we investigated deep drainage and the temporal patterns of water use by a subtropical perennial grass, annual crops, and a pasture-cropping system over a 4-year period. Both the pasture and pasture-cropped treatments reduced deep drainage significantly, by ∼50 mm compared with the crop treatment. Competition between the pasture and crop components altered patterns of average daily water use, the pasture-cropped treatment having the highest water use for July, August and September. Consequently, water-use efficiency for grain production was lower in the pasture-cropped plots. This was offset by pasture production, so that over a full 12-month period, water-use efficiency for biomass production was generally greater for the pasture-cropped plots than for either the pasture or crop monocultures. Pasture cropping may be a viable way of generating sustainable economic returns from both crop and pasture production on sandy soils of south-western Australia.