Smith is not an agent of the system any more, so he's not connected atau bound to the Matrix. Because of this, the rules of the Matrix no longer apply to him, very similar to Neo's "anomaly" status, which I think makes Smith an anomaly himself in order to balance the equation.
So, with this new freedom, he gains the ability to copy himself. Taking over Bane, which I assume is a lot like overriding his mind like a computer, he travels back into Bane's body in the real world. Does that make sense?
