Benthic oxygen and nutrient fluxes, and rates of nitrate reduction, were determined seasonally under light and dark conditions at four sites within a sub-tropical coastal lagoon (Coombabah Lake, Australia). Sediments at all sites were strongly heterotrophic acting as strong oxygen sinks and sources of dissolved inorganic nitrogen (DIN) in all seasons during both light and dark incubations. Sediment oxygen demand (SOD) and DIN effluxes were greatest during summer, but showed only a relatively small degree of seasonal variation. In contrast, there was a strong spatial trend in SOD and DIN effluxes, which were consistently greater at the sites with fine grained compared to the coarser sediments. Microphytobenthos (MPB) directly influenced SOD and DIN effluxes, with lower SOD and DIN effluxes measured during all light incubations. Strong correlations were found between sediment chlorophyll-a content and light–dark shifts in oxygen and ammonium fluxes (ΔO2 and ΔNH4+), and between ΔO2 and ΔNH4+. Rates of total nitrate reduction were relatively low ranging from 3 to 26 μmol N m−2 h−1 and exhibited only minor seasonal variations. Dissimilatory nitrate reduction to ammonium (DNRA) was the dominant pathway for nitrate reduction, accounting for on average, 65 and 68% of total nitrate reduction during light and dark incubations, respectively. Nitrification was the dominant source of nitrate fuelling nitrate reduction processes, accounting for approximately 90% of total nitrate supply. In contrast to typical MPB colonised sediments, rates of nitrification and, as a consequence, nitrate reduction rates were consistently stimulated in the light, indicating that MPB primarily influenced these processes through photosynthetic oxygen evolution rather than through competition for inorganic N-species.