The 37-year-old has the right to choose if she wants to be considered a top 10 player due to her length of service to the WTA. But if Williams was to take that option she would potentially miss out on around a million dollars in bonuses at the end of the year.
The world number five has not played at Homebush since 1998 when she lost in the final to Spain's Arantxa Sanchez-Vicario as a teenager.
The American, now 37 and a seven-time grand slam winner, is coming off a stellar season.
She has achieved her highest ranking since January 2011 after reaching grand slam finals at Wimbledon and Melbourne, where she was a 6-4 6-4 loser to Serena.
"This was one of the earliest tournaments I ever played and has always held a special place in my heart," Williams said.
"The last time I played in the Sydney International I was 18-years-old, so a lot has changed in this time.
"I have been playing some really great tennis this year and I feel I'm in a strong position, both physically and mentally, in the lead up to Sydney.
"The Australian summer is always a favourite of mine. I really love the atmosphere the crowds bring and I'm confident in my preparation over the next few months to put on a good show for the Australian fans."
The Sydney International will be contested from January 7-13.
