Lee grabbed the first two of his six birdies in the opening three holes to hit the top of the leaderboard but former Masters champion Scott played some brilliant golf to stay on his heels throughout the day at Royal Queensland.
Scott sunk back-to-back birdies at the third and fourth holes, lipped out with his approach shot at the 10th and narrowly missed out on an albatross when his tee shot pinged off the flag at the 12th.
The Queenslander then also lipped out with his eagle putt but did manage to pick up a sixth birdie and parred his way home for a 65 and second place behind Lee, who drained a 10-foot birdie putt at the 15th to move to 12-under for the tournament.
"It's always nice to have a bogey-free round, I probably haven't had many of them this year," said Scott, who won the title in 2013 and 2019.
"I feel like my swing from the tee to the green is feeling better than it has for a while and that's a nice thing for me."
Lee's playing partner Smith, winner of the tournament in three of the last five years and the 2022 British Open champion, had another utterly miserable day at the A$2 million ($1.3 million) tournament in his home city of Brisbane.
He took out his frustrations with a swing at his bag at one stage as he missed fairways and putts with regularity before finishing his round with a bogey to exit the tournament on nine-over-par.
"Australia's been so good to me even when I have been tired so there's no reason to really perform that way ... I've performed under pressure before, it's just unacceptable," he told reporters, struggling to contain his emotions.
"I just got on the wrong side a bunch of times and was trying to do a bit too much I think ... it's very frustrating."
Another Australian, John Lyras, was in third place on 10 under after carding 67 to move two shots clear of compatriots Lucas Herbert (68) and Curtis Luck (67), the latter firing his round with an early hole-in-one at the par-three 17th.
They shared fourth place on eight-under with Spanish overnight leader Joel Moscatel Nachshon, who was unable to back up his sizzling opening-round 63 and signed for an even par 71.
