The Australian Communications and Media Authority has found the episode, rated PG when it aired on Foxtel last year, should have been rated M.
ACMA said the episode entitled Death is a Bitch breached the subscription television code of conduct because it featured sexual references and violence exceeding the mild level allowed in PG programs.
The authority investigated the episode after receiving a complaint from a viewer who took offence to a scene in which the character Death has sex with a dead girl in the back seat of a car.
"ACMA considers that while younger children may not understand the reference, older children under the age of 15 years may do so,`` it said.
"And while the sexual activity depicted is considered to be discreetly implied by the animated depiction, necrophilia, even by way of an animated reference, contains an inherent impact higher than mild."
ACMA dismissed Foxtel`s argument that the PG rating was justified because the episode was so unreal it could not be taken seriously.
Foxtel will reclassify the episode as M for future screenings and will review the classification of all other episodes of Family Guy.
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