Not sure on how the smartcraft reads voltage but battery is probably just shagged. Have you load tested the battery ? Does the voltage drop right down when you go to crank ?

Yes you are right. The motor is dropping the voltage to the point it is insufficient to operate the starter motor. Sounds like the culprit battery has a failed cell. These can be very illusive because they may read sufficiently to start the motor but as soon as a heavy load is put on it ie. cranking the motor, it dramatically drops the voltage.

Just to be on the safe side, get yourself two new marine batteries and be done with it.

 Is there an ACR or a battery switch connecting/isolating the two batteries?

You've answered your own question that one of the batteries is dead as it can't sustain the current draw. If the batteries are joined electrically then it is wise to replace both batteries with the same capacity as if they are different you can damage one or the other when it tries to normalise the voltage continuously.

 I had a similar experience with mine. check the main fuse to the smart craft gauges. mine was corroded and was not supplying the correct voltage to the gauges, which in turn had the same effect when starting the motor. I thought it was my batteries as well but that's all it ended up being. the fuse for mine was located at the battery near the isolator 

As per Zoom and David its best to have both batteries the same, further more always replace both batteries - even if they are the same the older battery will pull down the newer one resulting in the newer one not lasting as long as it otherwise would. 

Also when they are the same type age - when one goes you know the other is not far behind hence another reason to replace both

Motor would start with 1 battery when cold, then some months later needed both together.  Finally wouldn't start with the clicking noise you referred to even with both batteries showing correct voltage.  It was a corroded join in the cable running to the motor where it had been joined, and these joins are common as the motor is supplied with short leads that often need to be extended on installation.  Replaced the joint and all fixed.

Crook battery by the sound of it.

I was looking at buying a boat with a 300 verado a little while ago and did a bit of research. Due to the large and constant current draw of the electronics and power steering the yanks recommend 2 x good quality batteries per motor and a separate house battery for everything else.

 Verados need a very high cold cranking amp battery do you have the correct ones fitted but sounds like your battery has dropped a cell

 As srike zone said. veradahs require and the installers should have fitted very large battery's to your boat when the motor was fitted up , veradahs need high cranking power and one of the 480 sensors fitted to the motor will soon shut it down, unfortunately your using a digital meter which generally will always show high voltage on a average battery even if there's a problem , always measure the voltage at the motor when cranking and you will get a lower reading than 12.7 volts . Either the battery's are not in good order or there's volt drop from battery's to motor when under load. iMO 

easiest way to check if one of your batteries is stuffed or the cabling is to swap the batteries around and see if the fault transfers. if it does you have a stuffed battery. if it doesnt then some cableing is faulty. you will then need to do a volt drop test have a look here on how to do it http://www.freeasestudyguides.com/voltage-drop-test.html

Cheers Joel

Thanks for your input guys.
So far we have confirmed that it isn't the smart craft stopping the motor even though it is reading lower voltage than the actual batteries. So that is now being ignored.

We then swapped the batteries. Originally it wouldnt start on battery 2. When we swapped the batteries, it still wouldn't start on the new battery 2 (old battery 1). This confirmed that it wasnt a battery problem, but a cabling or switch problem.

Next I swapped the connections at the cole hersee switch so the battery 2 was now connected to battery 1 input and vice versa. The problem then transferred to the connection at battery 1 (it would now start fine using the new connection at battery 2). Confused?
Anyway, it looks to me at the moment like its a connection problem between the cole hersee and the battery. The cable itself and connectors looks OK, but will try replacing it next week and see if it makes a difference.
Thanks for your input. I will update if/when we fix the problem.