The protesters, part of a queer activist group called the Department of Homo Affairs, carried banners decrying the Liberal Party, whose official float travelled behind them.
"The liberal party celebrates invasion. They invade our celebration. They are an unauthorised entry at Mardi Gras and their endeavour to celebrate 250 years of white supremacy will be intercepted," the group posted on social media.
It is understood the protesters, who wore navy blue jumpsuits and Scott Morrison masks, were not officially registered as part of the Mardi Gras celebrations.
Greens leader Adam Bandt posted a video of a protester being removed from the parade route at Taylor Square.
Some have praised the group's actions, drawing a comparison to the historical roots of Sydney's Mardi Gras.
The Sydney Mardi Gras commemorates the 78ers, a group of protesters who were arrested and beaten by police when they tried to march as part of international gay celebrations back in 1978.
A night of recognition
The volunteer heroes of Australia's bushfire crisis were crowd favourites among the 191 floats decked out for the parade.
NSW Rural Fire Service volunteer Sarah Paterson was one of about 80 RFS members taking part.
"After fighting fires through summer it's good for us to let our hair down," she said.
"I missed Christmas and New Year's Eve because I was fighting fires, so this is like Christmas to me."
As per tradition, the Dykes on Bikes kicked off the parade on Saturday evening.
Grammy Award-winning UK singer Sam Smith headlined the afterparty alongside American pop performer Kesha and Brazilian drag queen Pablo Vittar.
Additional reporting by AAP