The council's general manager Ken Gouldthorp said the transaction surrounding the installation of the Whitely Black Totem II sculpture at Newcastle Art Gallery was a key component of an investigation into the gallery's activities, and its dealing with the Newcastle Art Gallery Foundation - a fund-raising body for the gallery.

The council suspended the gallery's director Ron Ramsey and its future city director Judy Jaeger late last year.

Last week councillors were briefed on the transaction by PricewaterhouseCoopers at an extraordinary council meeting.

After the meeting, the council issued a statement.

In it, Mr Gouldthorp said Ron Ramsey publicly announced the sculpture was a gift.

"The council's concern relates to what appears to be $350,000 payment for the sculpture and failure to disclose this payment on documents lodged with relevant agencies," Mr Gouldthorp said.

"I also met with the directors of the Art Gallery Foundation prior to the meeting.

"The foundation has not responded to previous requests for information about the transaction requested by council and the independent investigator."

Newcastle lord mayor Jeff McCloy said "the matter had potential serious tax and other implications and liability for both the foundation and the council".

In the statement, the council said it was investigating the matter further.

It wants to mitigate the possibility of the de-registration of the foundation and the council's tax deductible gift recipient status.

In the meantime, the council decided to suspend all further transactions with the foundation, including the acceptance of donations, until the council's concerns are addressed.