The Open champion and world number three began the day trailing compatriot Jason Scrivener by a single stroke - a deficit he quickly set about erasing.
Smith took the lead with birdies on four of his first seven holes, before a dropped shot on the par-five ninth signalled a significant change in momentum, leading to two more bogeys on holes 11 and 12.
But the 29-year-old relied on his Tour experience to reset and pick up two more birdies down the stretch.
Despite dropping another shot on the 18th, Smith's score of two-under 69 was enough to carry a three-shot advantage into Sunday, ahead of China's Yan Wei Liu and Masahiro Kawamura of Japan.
Four others, including Australians Min Woo Lee (68) and second-round leader Jason Scrivener (74) were at seven-under, four behind Smith.
Scrivener, the overnight leader, fell down the pecking order after carding five bogeys en route to his three-over 74.
He did manage to recover with two closing birdies after dropping five shots in his first 16 holes, but it wasn't enough to stop Smith's charge.
The Australian PGA Championship is one of two DP World Tour events being held this week along with the Joburg Open in South Africa.