The 25 year old came into the final day at RACV Royal Pines Resort with a three-shot lead but found himself two behind after nine holes as Leishman turned in 32 to move ahead.
Smith is made of stern stuff, however, and he came home in 33 to sign for a 70 and finish at 16 under, two shots clear of the World Number 21.
England’s Ross McGowan broke the course record with a 63 to finish at 11 under alongside Australian Matthew Millar.
Jake McLeod signed for a closing 74 to finish in a tie for 19th and that was good enough to secure the Australian the Order of Merit on the PGA Tour of Australasia and a European Tour card for the rest of the 2019 season.
Smith’s second European Tour victory comes in just his 20th event and makes him the first player to successfully defend this title since Robert Allenby in 2001.
“I was expecting Leish to come out and give it a good crack today,” he said “It’s always hard going up against a mate and trying to win a golf tournament. I’ve been in this situation before and I’ve had it happen to me as well. I’m sure we’ll have a beer over Christmas or when I see him next and we’ll be back to being mates.
“I’ve definitely improved a lot over the last year. I’ve put in a lot of hard work and I’ve just stuck to my process goals.
“I would love to get into the top 20 by the end of this year, it’s definitely the next goal. I think that’s the next big step for myself, to get in there and get myself in a lot of situations where I can win golf tournaments.”
Both Smith and Leishman went a long way left off the first tee, with the leader having to take a drop from an unplayable lie in a bush. Leishman did well to find the green and save his par but Smith dropped a shot and the lead was down to two.
Leishman hit a beautiful third into the par-five third to get to 12 under and while Smith made an excellent save to make a par, the lead was just one.
There was then a two-shot swing on the fourth as Leishman chipped in in spectacular fashion and with Smith making another bogey, it was Leishman who led.
The 35 year old put his tee-shot on the par-three fifth to tap-in range to go two ahead but Smith put an approach to six feet on the next to get back within one.
Leishman drove the green at the par-four eighth and got down in two to lead by two again and he maintained that advantage at the turn.
The final duo both birdied the par-five 12th and Smith also made a gain from 12 feet on the 13th to cut the lead to one before a Leishman bogey on the next left it tied at the top.
Smith found the 16th tee-box with his second on the 15th but got up and down to birdie the par five and when Leishman missed the green and bogeyed the par-three 16th, Smith led by two.
“I think Cam made birdies when he had to so all credit to him,” said Leishman. “I’m obviously disappointed I didn’t get it over the line but glad that I gave it a run there and made it pretty interesting.
“I’m happy for Cam, we had a good fight out there. I did want to win, I gave it my best and just didn’t make it.”
McGowan won the Madrid Masters in 2009 and nearly made the Ryder Cup Team in 2010 but lost his card in 2011 and despite coming through the Qualifying School in 2015 and 2017, has not kept hold of his playing privileges since.
He birdied the third, fourth, fifth and eighth to turn in 32 and then made four birdies in a row from the tenth to get into double-figures. Another gain came on the 15th and he parred his way home for a place in the history books.
Millar made birdies at the third, sixth, ninth, tenth and 11th, with a bogey on the last dropping him into a share of third.
South Korea’s Jaewoong Eom finished at seven under, a shot clear of Australian trio Ben Eccles, Nick Flanagan and Jason Scrivener.
India’s Gaganjeet Bhullar finished in T40 after scoring one-under-par 71 in the final round.