Labuschagne returns to the XI after he was dropped from the side following the World Test Championship Final against South Africa in June, with the right-hander having missed out on the three-match tour of the Caribbean against the West Indies that followed.
The former No.1 ranked Test batter has since contributed bulk runs at domestic level in Australia and Smith said it has proven enough to win a recall.
“Marnus, when he’s batting at his best at No.3, he makes us a very good cricket side,” Smith said on Thursday.
“We couldn’t really leave him out after he came back and did exactly what was told of him.
“The way he’s batted in Shield and one-day cricket for Queensland in the last couple of weeks has been amazing, so when he’s batting well, he’s tough to leave out and hopefully he can bring that to the Test arena now.
“For Beau, he’s the one that misses out unfortunately. He came into international cricket and lit it up immediately – it’s a really tough one on him.”