The 2022 British Open champion Smith was playing in front of his home crowd in Brisbane and huge crowds followed him as he shot a 65 to be 10-under-par after 36 holes.
Smylie carded a 67 to join him with Smith's LIV Golf teammate Marc Leishman a stroke further back.
Young South African Aldrich Potgieter and Australian David Micheluzzi were eight-under, while former world number one Jason Day fired a 69 to be four off the pace.
The opening event of the DP World Tour's 2025 season was drenched by torrential rain that forced officials to cancel Friday's second round and shorten the tournament to 54 holes.
But the sun came out as Smith downed seven birdies and a lone bogey, with the Australian determined to grab a first victory of 2024.
"It was nice," the 31-year-old said.
"(The sun) always puts a smile on your face and the golf was pretty good too. I started solid and kept it going."
Less than 15 minutes after Smith finished, Smylie, 22, struck a dazzling approach into the 18th for a closing birdie and a 67.
In 2019 Smylie was the recipient of a scholarship Smith runs for Australian junior golfers that included an all-expenses-paid trip to his hero's American home to learn how he prepared for tournaments.
"I learned what life is like being one of the best golfers in the world and what he goes through on a day-to-day basis," said Smylie.
"What he's done for Australian golf... he's been a great role model of mine for a very long time."
Smylie, the son of multiple tennis Grand Slam doubles champion Liz Smylie, is expecting a little less conversation when grouped with Smith as he chases the biggest win of his career on Sunday.
"There will be casual (chat) but he's wanting to beat me as much as I'm wanting to beat him," he said.
Smith is hoping to become just the fifth golfer in the near 100-year history of the Australian PGA to win it at least four times.
"It'd be nice, this is kind of my home event," he said.
"I have a lot of good family and friends cheering me on. But you still have to go out and do it and I'm looking forward to tomorrow."
