World number three Smith had to look on as Micheluzzi set the benchmark by firing a seven-under-par 63, good enough for the course record.
In contrast, Smith could only manage a one-over-par 71 that leaves him with plenty of work left to do on Friday if he hopes to make the cut, to say nothing of challenging for the title.
Asked to reflect on his performance at Kingston Heath on Thursday, the local favourite didn't mince his words.
"I thought it was all pretty rubbish to be honest," Smith said. "That's as bad as I've played in a long time.
"The course was pretty difficult, the conditions were pretty difficult, but still I need to be better than that."
Micheluzzi's 63 was way better than any other player managed on the day, and put him three shots clear of nearest rival Matthew Griffin.
A bogey on his opening hole, the 10th, gave no indication of what was to come, as Micheluzzi reeled off eight birdies to lead by as many as four at one stage.
"I know this course like the back of my hand, and I got the putter going too," Micheluzzi said.
"I've just got to do the same thing. Just hit it good tomorrow, shoot a decent score and then obviously come into the weekend, hopefully flopping with all the big boys."
Elsewhere, world number 36 Adam Scott mixed seven birdies mixed with four bogeys for a topsy-turvy one-under 71.
Meanwhile, the Australian Open made history on Thursday as the first national open to feature men and women competing on the same course at the same time.
Newcomer Grace Kim leads the way in Melbourne after equalling the women's course record at Kingston Heath with a seven-under 66.