The 48-year-old had attended Tenterfield Police Station when the confrontation happened on Thursday afternoon, police said.
"The police sadly had no other option but to shoot and the man was fatally injured as a result," Superintendent Steve Egginton told reporters on Friday.
"A tragic set of circumstances for everybody involved."
Despite the best efforts of emergency personnel the man died at the scene.
Police had initially responded to an address in Tenterfield amid concerns for the man's welfare, Supt Egginton said.
"They responded to that and it ended up in a set of circumstances where there was a confrontation out the front of the police station here at Tenterfield."
The investigation was ongoing, and Supt Egginton could not confirm how many police officers were involved in the shooting, or if anyone else had been threatened.
"We call for anyone who might have seen or been around the Tenterfield area around the police station at the time, yesterday afternoon, to get in touch with Crimestoppers and reach out please," he said.
The Homicide Squad will carry out a critical incident investigation, which will be independently overseen by the police watchdog.
The Law Enforcement Conduct Commission monitors all critical incidents by police and provides information to next of kin over whether investigations are thorough and objective.
"Police don't go to work at any point in their careers thinking they're going to use their firearms," Supt Egginton said.
"But at the end of the day, someone points a firearm at them they need to defend themselves."
Supt Egginton said counselling and other support would be offered to the officers involved and the man's family.
"We've got some good support mechanisms ... for short term recovery and for longer term stability of our officers," Supt Egginton said.
"There are children involved ,we'll be making sure that we're looking out for their welfare as well and providing them with what support we can."
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