The two vessels crashed on the Nepean River about 10 kilometres from Penrith at 1.30pm today.
Emergency services along with a good Samaritan came to the aid of 10 people and a dog, as one boat quickly sank.
Witnesses explained how the accident unfolded.
“I came up behind him and he stalled or was about to hit something and I hit his boat,” a witness told 9News.
“That’s my boat there, with all the front smashed in.”
The three people onboard the capsized boat scrambled onto the banks, 10 kilometres from the nearest boat ramp.
The area has no phone reception, and witnesses called for help.
Daniel Oderberg and his family helped with the rescue.
“We came by, towed them about a k (kilometre) down the river until there was a safe spot to stop,” Oderberg said.
Police, the State Emergency Service and Rural Fire Service were all involved in the rescue.
As summer approaches, authorities are pleading with those heading out on the water to be more vigilant than ever, particularly with many hazards still in the water following the recent floods.