Pseudobaeospora taluna is formally described from southern Australia, representing the first report of the genus from Australia given that P. lamingtonensis is excluded from the genus. Analysis of sequences of the internal transcribed spacer (ITS) shows that P. taluna is a distinct phylogenetic species. The distinctive morphological characteristics of the species are the combination of a pinkish grey to dull grey pileus, pale rhizomorphs at the base of the stipe extending into soil, thick-walled dextrinoid spores, presence of cheilo- and pleurocystidia, and a trichoderm pileipellis that stains bluish green in KOH. Three of the examined collections, from Tasmania, were 4-spored but a single collection from Victoria produced 2-spored basidia. Apart from the 2-spored basidia and larger spores, this 2-spored collection was similar in morphological and sequence characters to the 4-spored collections and is placed under P. taluna. The specific epithet was chosen in collaboration with the Tasmanian Aboriginal Centre and the palawa kani Language Program. In palawa kani, the language of Tasmanian Aborigines, taluna is the name of the Huon River area, where the holotype was collected.