The contentious episode featured asexual receptionist Gerald in a sexual encounter with male friend Lindsay. They were undressing and kissing.
Gerald was wearing his underwear, while Lindsay was topless but wore pants.
The Authority described the scene in a statement issued this morning: "The two characters were shown lying in bed talking, covered up to their bare chests by blankets. Lindsay went under the blankets and Gerald nervously asked him 'where are you going?'.
"Lindsay popped his head back up and replied 'itís a surprise' before descending back under but came back up when a ticklish Gerald began giggling.
"After Lindsay went back under the blankets, Gerald moved suddenly and accidentally hit Lindsay in the face with his knee, giving him a bloody nose."
The episode was found to be a breach of good taste, decency and children's interests as specified in the Free to Air Television Code of Broadcasting Practice.
The programme had been rated PGR and a verbal and written warning preceded the show.
However, the authority said the scene in question was not suitable for child viewers, even when subject to guidance from parent or adult.
They made it clear that its findings had nothing to do with the fact that the scene involved two men, saying "the scene would have been equally inappropriate if it had involved a heterosexual couple".
"Irrespective of the charactersí sexual orientation, the broadcaster did not adequately consider the interests of child viewers by including such an unambiguous sex scene in a programme broadcast at 7pm."
An order has not been imposed on the show, with the authority saying its decision clarified its expectations surrounding the broadcast of sexual content of this nature during the PGR time-band at 7pm.
It also noted that TVNZ had reviewed the appraisal process for Shortland Street, and was satisfied that procedures had been put in place to ensure that similar breaches did not occur in the future.
The authority acknowledged that the decision was likely to receive extensive publicity due to the nature of the complaint and the programme involved.
Lewis Cross from Balclutha wrote a formal complaint to TVNZ stating the Shortland Street episode had showed graphic details about the developing homosexual relationship between two young men.
He said he was appalled that TVNZ was "prepared to accept it is suitable family viewing to show a pair of men undressing, getting into bed and one disappearing under the blankets to obviously start oral sex with his mate".
Mr Cross said he would have enough of a problem explaining to younger kids what might be happening under the bed clothes if it had been a heterosexual couple.
This is the first time that a complaint against Shortland Street has been upheld by the BSA.