The plane was discovered upside down at the bottom of Corwan Creek under 13 metres of water.
Police divers have recovered six bodies from the wreckage.
A police spokesperson has said: “For reason that are not known at this stage, the plane has hit the water and it has subsequently sunk.
“At the time of the collision, there was a pilot and five passengers on board. I can confirm the six people on the plane are deceased.”
The passengers were on a wine and dine experience on the sea plane, which offers views across Sydney.
Local reports say four of the passengers were British and an 11-year-old boy was among the dead.
The plane was believed to have been travelling from the Cottage Point Inn to Rose Bay.
TV journalist for 7NewsSydney, Freya Cole, tweeted: “Horrific details coming out of this seaplane crash in the Hawkesbury River.
“Among the six victims are believed to be an 11 year old boy, the pilot and 4 British nationals.”
The crash took place at 3:10pm local time.
Debris and oil were found on the surface of the sea where the plane went down.
Rescue vessels, including police and ambulance helicopters, attended the scene.
The journey from Cottage Point to Rose Bay would normally take 20 minutes.
The Australian Transport Safety Bureau will investigate the incident.
A Sydney Seaplane spokesman confirmed that it was one of their aircrafts that had crashed but couldn’t provide any further information.
He said: “Obviously we are very concerned and trying to determine the details at this point. We are working with police at this time.”
Sydney Seaplanes fly over the city, above some of the city’s best views, including the Opera House, the Harbour Bridge and the bushland of the Hawkesbury River region.
The crash happened hours before the city’s world famous New Year’s Eve celebrations.
Pippa Middleton had been on a sea plane to enjoy Sydney when she was there on her honeymoon.