NSW Police officers were responding to reports a car had driven into a tree near the township of Rugby, 84km north of Yass, about 2.50pm on Sunday.
Officers at the scene found a Chrysler station wagon that had crashed into a tree, with the driver appearing to be unconscious in the car.
NSW Assistant Commissioner Stephen Hegarty said police had been told the driver had a weapon in the car at the time of the crash.
"They received a phone call from members of the public that were concerned, and they reported a car crash … into a tree, and into a ditch," he told reporters on Monday.
"As they approached that vehicle, they tried to speak and communicate with that person … (he) took possession of a firearm and pointed it directly at the police officer."
Asst Comm Hegarty said officers then opened fire, with the man dying at the scene despite resuscitation efforts.
He expressed his condolences to the family of the man, who has not yet been formally identified, but was confirmed to be aged 45.
The assistant commissioner said there were six officers at the scene, adding it was too early in the investigation to say how many had fired their guns.
It was also unclear what led to the crash, he said.
However, he said the 45-year-old was known to police and had previous firearm offences.
He commended the bravery of the officers for approaching the car, and said all the first responders were being supported after the incident.
Paramedics were also at the scene.
"It's unfortunate police have to go through (this)," Asst Comm Hegarty said.
"They've gone through a traumatic incident."
The investigation will be the subject of an independent review by the Professional Standards Command and overseen by the Law Enforcement Conduct Commission.
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