Warren Rodwell was freed on Saturday near Pagadian city in the southern Philippines, police said.
He was kidnapped by Abu Sayyaf militants in 2011, and had last been shown alive in a video posted on social media websites in December.
Abu Sayyaf is considered the smallest and most radical of the extremist movements in the southern Philippines.
Australian Foreign Minister Bob Carr welcomed the news, saying the release had been the result of a joint effort by authorities in both countries.
“The Philippines government had the lead role in this case and deserve congratulations for their tireless efforts on Mr. Rodwell’s behalf,” said Bob Carr.
Bob Carr added that Warren Rodwell was being moved to a safe location and that the focus now was on his recovery.
Warren Rodwell – who runs a shop with his wife in the Philippines’ seaside town of Ipil, close to Zamboanga in south-western Mindanao – was abducted in December 2011.
A number of foreigners have been kidnapped for ransom in the southern Philippines. The Australian government has a longstanding policy of refusing to pay ransom for its citizens.
Areas within the region are used as bases by Islamist militants and rebel groups.
Abu Sayyaf militants remain a security threat in the impoverished region, where minority Muslims have been fighting for self-rule for decades.
The main Muslim separatist group, the Moro Islamic Liberation Front, last year signed a peace accord with the government in exchange for broad autonomy.
But Abu Sayyaf were among the rebel groups who refused to sign up to the peace deal.
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