The family of Dwayne Johnstone say it is "wonderful" the Wiradjuri man's death has been referred to the NSW Director of Public Prosecutions.
The 43-year-old was cuffed and shackled when he was shot in the back after attempting to escape from NSW Corrections officers in March, 2019.
Mr Johnstone's mother Kerry Crawford said the decision was good news.
"It's not going to bring him back or nothing but it's a step in the right direction for everyone that's in custody, black or white," she told NITV News on Thursday.
"The laws need to be changed and this is the first step."
Now that the matter has been referred, the DPP will consider whether to prosecute the guard who fatally shot Mr Johnstone.
Mr Johnstone was shot after running from two corrections officers who were escorting him from Lismore Base Hospital to a transfer van.
He'd earlier suffered a seizure in a cell at Lismore Court House and had been taken to the hospital for treatment.
As he was being transferred to the van, Mr Johnstone elbowed the officer who had hold of him by the pants, and ran across the road.
A second corrections officer, who was armed with a revolver, fired three shots, the last of which killed Mr Johnstone. Neither of the two corrections officers were armed with any less lethal weapons like a taser, baton or capsicum spray.
Aboriginal Legal Service solicitor Hannah Donaldson is representing some of Mr Johnstone's family including his partner, father and stepmother.
In a statement on behalf of the family, Ms Donaldson said they were pleased at the decision but there was still a long way to go to find justice for Mr Johnstone's family.
"We are so glad that the matter has been taken so seriously," she said.