The phrase implies transferring emotions, often anger or frustration, from the true source to an undeserving target. He failed his test and took it out on his little brother by yelling at him.
Pro Tip 2/3
Negative Context
Usually used in a negative context, it's about inappropriate outbursts towards others. Even though she was upset, she didn't take it out on her friends.
Pro Tip 3/3
Unfair Behavior
It highlights an element of unfairness, as the recipient is not to blame. I know you had a bad day, but don't take it out on the waiter.