Michael Woods (Cannondale) was third while a gutsy ride from Jay McCarthy (Tinkoff) saw him finish the day in fourth.
Stage 3 saw riders tackle 139km from Glenelg to Campbelltown, but for all but one rider in the race, the plan for the day's racing came down to a nailbiting final 10 kilometres.
Laurens De Vreese (Astana) broke away from the bunch early in the stage. He quickly built a lead of over three minutes with more than 90km left to pedal; a lead which grew by another minute as the peloton toyed with him from behind.
While Jens Voigt likened De Vreese's experience to that of a slowly roasted chicken, the bunch paced their efforts to catch the lone escapee, careful not to waste too much energy before the real action would begin.
The catch came with 21.4km to go.
A crash soon split the peloton with the most of the stage favourites relegated to the second group where they were forced to lift the tempo and regroup to secure an optimum position for the crucial descent down Gorge Road.
Sky controlled most of the decisive descent before Tinkoff took to the front just before the turn off to Corkscrew Road. The perfectly timed moved positioned the race leader, McCarthy, in prime position for commencing the event's most anticipated ascent.
With six kilometres to go McCarthy, fuelled by his ochre leader's jersey attacked on the climb. He was swiftly followed by Gerrans (Orica-GreenEDGE) and Richie Porte (BMC).
The group soon split with all three Australians falling behind. Gerrans measured his effort with the final few kilometres in mind while Porte eventually dropped back to pace team-mate Dennis to the line.
Sergio Henao (Sky) was first accross the KOM with Cannondale's Woods in tow and a small gap to the fractured bunch behind.
— Tour Down Under (@tourdownunder) January 21, 2016
In the five kilometres that followed, eight riders caught the two leaders. The group of ten jostled for position at speeds of over 104 kilometres an hour on their way to the finish line.
Last year's overall winner, Dennis looked to have won the sprint but photos revealed that Gerrans got the win after he flew up the finishing straight from behind.
"That was super tough going up the Corkscrew,” said Gerrans.
“There’s obviously some really good riders in the race, so I really had to time it well and just come back over the top. And we were able to catch the first couple of riders in the descent.
"My team-mates set me up perfectly for that climb, they had me positioned in the third wheel, it’s really thanks to them I was able to get this result.
"Rohan and I drag raced through the last 100 metres to the line, and I was just able to get over, so I’m really chuffed."
The victory moves Gerrans into the ochre leader's jersey with three stages remaining.