''I sat down in this guy's glass office and he told me that I could have his life,'' she says. ''He said, 'Cate, you could have the perfect life. You could live in the Hollywood Hills, you could have a dog, you could have a beautiful home.' I had a mini panic attack and said I had to leave. It was like starring in The Truman Show.''

Since that day, Shortland has been trying to figure out what the second act in her professional life will be. It's been a long journey, across continents and through personal change, and it ends this month with a return to making movies, an outcome that at certain points in the past appeared more than just unlikely. Shortland's new work, the German-Australian production Lore, confirms and extends the great promise of Somersault and makes you glad her fallow creative years are done with.

''I was quite wary about making another movie,'' says the 44-year-old, who passed through Melbourne this week on her way to the Toronto International Film Festival. ''I got anxious about the media and didn't know how to deal with them, but now I'm resolved of that. I've been attached to a few projects but the reason I kept going with this one is that it's my passion. I'm so happy that I did because it's given me a lot of love to get back to making films.''

In the wake of Somersault's success, when its emotional intimacy was criticised as lacking in commercial appeal and an unnecessary backlash briefly formed after the film swept the 2004 Australian Film Institute awards with 13 nods, a somewhat wounded Shortland found herself travelling from one international film festival to another.

Even as she wondered if she'd make another film, the seeds of Lore were planted when Scottish producer Paul Welsh introduced himself following an Edinburgh screening and passed on Rachel Seiffert's novel The Dark Room.

The English author's book was written in lyrical fragments, similar to the way Shortland prepares her scripts and shoots them, and since 2006 she had been thinking about it as a movie, intermittently working on it and then putting it aside.

It's a World War II story set in May 1945, in a devastated Germany during the final days of Adolf Hitler's Nazi regime and the chaotic aftermath of its collapse and his death. The unquestioned belief in National Socialism ends suddenly for five children when their father, an SS officer, flees and their mother subsequently leaves their rural bolt-hole to hand herself in to the American occupiers. It is the responsibility of the previously sheltered 15-year-old Lore (Saskia Rosendahl) to get her younger teenage sister, two small brothers and an unweaned baby across the remnants of the country to a grandparent's care.

The periods spent translating the novel to the screen were informed by Shortland's life. In 2008 she and her husband, fellow filmmaker Tony Krawitz (Jewboy, November's Dead Europe), relocated to South Africa for a project he was working on. Shortland worked for a non-government organisation outside Soweto and the pair was reunited with the young South African boy they hoped would join their family. Eventually they adopted Jonathan, now 17, and then Ruby, now four, who live with the two directors in their home in Sydney's inner west.

It was also easier to visit Germany from Johannesburg, so Shortland was able to get a sense of the country and its 20th-century history as she worked on the screenplay. On an immediate level she realised the adaptation would have to be in German, with English subtitles, but beyond that she began to consider how nations deal with the stigma of past failings, whether it was Germany and the Holocaust, South Africa and apartheid, or Australia's white colonisation.

''We don't like history here, unless it's a celebration or something mythical, but what's happened in Germany is that they have this horrendous history they're filled with shame about, but the way they've dealt with it has given them immense pride as a nation,'' Shortland says. ''When you go to Germany now there's this lack of anger about these issues, which is the opposite to Australia, and that comes from being direct and transparent about what happened. If we, as a nation, could grow into that, it could open this country up in a really profound way.''

Like Abbie Cornish's Heidi, the protagonist of Somersault, Saskia Rosendahl's Lore is a teenage girl on the cusp of adulthood, aware of her sexuality but confused by it. However, instead of drawing back, as Heidi does, Lore pushes onwards through both physical danger and the realisation that her beliefs have been repudiated. As the children move towards their destination they're joined by Thomas (Kai-Peter Malina), a Jewish refugee Lore is drawn to despite her anti-Semitic indoctrination.

The few faded photographs Thomas carries with his papers are actually photos of Krawitz's forebears, who were German Jews, and on the first day of shooting Shortland's husband delivered the Kaddish, a Jewish prayer for the dead, on set. But for Shortland, a convert to Judaism, living and working in Germany came with a steady, unrelenting pressure. Even on her first day in Hamburg, just off the plane, the husband of Lore's production designer took her to a food hall where a wall that stood over the fast-food joints was filled with Hebrew names. The site, she learnt, was a former Jewish cemetery the Nazis had built over.

''I cried so much about the victims, but when I was working in Germany I couldn't really talk to anyone about it because you feel like it upsets them so much - people would have a couple of drinks and burst intro tears,'' Shortland says. ''Every single place you go to, something happened there. Even the park where Ruby used to play in Berlin was where they murdered a whole lot of people.''

In Lore, Shortland weaves the personal and the political together so that each influences the other. It's a beautiful, tense film, shot by young Australian cinematographer Adam Arkapaw (Animal Kingdom), and alive to the summer landscape. Shortland's ability to accumulate tiny, telling moments, whether sensual or shocking, builds to a complete picture that leaves the viewer to ponder Lore's subsequent life.

''There's no happy ending where we try to manipulate the audience,'' Shortland says. That will almost certainly extend to her next project, a six-part television series looking at 1915's Gallipoli campaign through the eyes of newspaper correspondents. Her fascination with history and national image, fuelled by Lore, is only just beginning.

''Gallipoli has such a profound impact on how we define ourselves and how we define masculinity in this country and I'm really interested in looking at the nuances of that,'' Shortland says. ''The worst situations in human history are when you have people acting in the most fascinating, different ways, both good and bad.''

■Lore opens in cinemas on Thursday, September 20.