Smith bowed out of international rugby in 2009 after making 110 appearances for Australia - including all three tests against the 2001 British Lions - but will now win his 111th cap against the tourists at Sydney's Olympic Stadium.
Once one of the best openside flankers in the world, Smith stormed back into contention for this year's Lions tour on the back of some brilliant performances for the ACT Brumbies.
He looked like being ruled out by a knee injury on the eve of the initial squad announcement but a remarkably quick recovery saw him called into the squad after Australia's first test defeat.
Coach Robbie Deans said it had not been a difficult decision to make the change, which was the only one to his starting line-up from the side that beat the Lions 16-15 in the second test in Melbourne last weekend.
"Pretty straightforward really, it's not a big decision to select George," Deans told a news conference.
"He's a great bloke to have around. He's a quality bloke aside from the game and obviously he's very experienced so he will bring a lot of composure to the group.
"He's better than when he left to be frank. He's played some remarkable rugby in Super Rugby and we'll get the benefit of that experience."
The 32-year-old's surprise selection on Thursday sees incumbent openside Michael Hooper dropped to the bench and Liam Gill missing out altogether - a tough call on a player whose late line-out steal played a major role in Australia winning the second test.
Deans was keen to point out that Smith's selection in no way reflected dissatisfaction with the other two opensides.
"Hoops has had the privilege of playing two tests against the Lions and he'll get the advantage of playing a third one as well, and his involvement might be defining," he said
"It's not about which part you owned, which piece you contribute, it's about adding value to the group and that goes to the blokes who aren't lucky enough to be pulling on the jersey as well."
Loose forward Ben McCalman was named on the bench as cover for blindside flanker and number eight in the only other addition to the squad.
"Ben McCalman offers us a little bit more versatility, he's a very good loose forward," Deans added.
"He's coming back into his own, he's in great shape, he offers us versatility and covers a lot of position, strong over the ball, real physical presence and all those are going to be key components this week."
Deans has gambled on a 6-2 split in favour of the forwards on the bench with only backup scrumhalf Nick Phipps and uncapped fullback Jesse Mogg to cover the backline.
Even with three backs on the bench in the 23-21 first test defeat in Brisbane, the Wallabies were left shorthanded after three backs went off injured with Hooper ending up playing in the centres.
Deans said his bench had everything he needed and dismissed concerns that centre Adam Ashley-Cooper was carrying an injury.
"He's great. He's 100 percent," he said. "We've got plans, don't worry about that. And they're good ones.
"Every decision you make is a gamble. We believe it offers us what we need in this game."
Smith said his recall for the deciding test was the "ultimate", adding that this would definitely be his final match in the gold jersey.
"This just caps it off," he said. "I retired in 2009 in Wales and played away from home with not too many friends and family there watching.
"This gives me the opportunity to play in front of them and to play in front of an Australian crowd on my home soil.
"That will be fitting for my career to look back on and say, I've finished on a great occasion, a big moment."
Team: 15-Kurtley Beale, 14-Israel Folau, 13-Adam Ashley-Cooper, 12-Christian Leali'ifano, 11-Joe Tomane, 10-James O'Connor, 9-Will Genia, 8-Wycliff Palu, 7-George Smith, 6-Ben Mowen, 5-James Horwill (captain), 4-Kane Douglas, 3-Ben Alexander, 2-Stephen Moore, 1-Benn Robinson
Replacements: 16-Saia Fainga'a, 17-James Slipper, 18-Sekope Kepu, 19-Rob Simmons, 20-Ben McCalman, 21-Michael Hooper, 22-Nick Phipps, 23-Jesse Mogg