Koalas (Phascolarctidae) are uncommon elements within the Australian fossil record. The earliest representatives are recorded from late Oligocene rainforest assemblages of central Australia. In contrast, the extant Koala Phascolarctos cinereus Blainville, 1816 (the only surviving member of a once diverse family) is found only in eastern Australian open woodlands. Extinction of koalas from rainforests was previously thought to have occurred after the middle Miocene. Recent systematic cave excavations at Mt. Etna, central eastern Queensland, Australia, have revealed several remarkable new middle Pleistocene vertebrate assemblages that are dominated by rainforest-adapted taxa. Within one of the deposits, we have identified a new, but archaic, genus and species of koala. Invictokoala monticola gen. et sp. nov. shares affinities with the most plesiomorphic member of the family, Madakoala Woodburne et al., 1987 (late Oligocene), but is distinguished by possessing higher-crowned upper molars, with a tricsupate (rather than linear) paraconule on M2 (autapomorphic condition within koalas), closely positioned stylar cusps, and better-developed posterior cingulae. Thus, not only does I. monticola represent a ‘holdover’ from an Oligocene ancestor, but the Madakoala–Invictokoala stem represents a ‘ghost’ lineage within the Phascolarctidae, with no representatives known between the late Oligocene and middle Pleistocene. Previously, it was thought that the post-middle Miocene loss of koalas from rainforests may have been a result of a co-evolved dependence of koalas to open eucalypt woodlands, and/or competitive exclusion with koala-like rainforest-adapted ringtail possums. However, the inferred diet of middle Pleistocene I. monticola (i.e. non-Eucalyptus) and coeval occurrence with numerous rainforest-adapted ringtail possums does not support that hypothesis. It appears more likely that koalas had always been closely associated with rainforests, at least until the late Quaternary extinction of I. monticola. Generally, the paucity of rainforest faunal assemblages, and specifically, records of fossil koalas through the late Cenozoic drastically limits our understanding of their evolution.