New South Wales Police Force and the Australian Transport Safety Bureau (ATSB) are investigating the cause of the crash.
Police said they did not immediately know the cause of the crash, nor the identities of the five passengers, but were speaking with several witnesses who were in boats on of the waterways' busiest days of the year.
Six people including the pilot were on board the plane when it crashed off Jerusalem Bay near Cowan, north of Sydney, at around 3.10pm (4.10am GMT) on Sunday, police said.
The plane, which went down in Cowan Creek, north of Sydney on Sunday, will need to be brought back to the surface before forensic air-crash investigators can piece together what went wrong.
There are unconfirmed reports the tragic victims were British nationals and the Foreign Office said it is in contact with local authorities.
The DHC-2 Beaver Seaplane was returning to Rose Bay in Sydney Harbour when it crashed and sunk rapidly, according to local reports.
"The plane has hit the water and it has subsequently sunk", Gorman said.
The UK's Foreign Office has said it is in contact with authorities in Australia and ready to provide consular assistance.
Police Acting Superintendent Michael Gorman told CNN affiliate Seven Network that the aircraft had been flying west over the Hawkesbury River when it crashed. "It's too early in the investigation so we don't know why the plane crashed".
Sydney Seaplanes has been in business for 80 years. Celebrities to have taken scenic flights with them include Pippa Middleton, Ed Sheeran, Bill Gates, Jerry Seinfeld and Cuba Gooding Jr.
Sydney Seaplanes has been operating since 1938, originally flying from Australia to Britain, a journey that required thirty refuelling stops along what became famous as the "Kangaroo" route.