The front cover of the magazine features Melbourne photographer Polixeni Papapetrou's 2003 photo of her naked daughter, who was six at the time.
The New South Wales Government is referring the magazine to the Classification Board.
The Prime Minister has said he cannot stand the picture and federal Arts Minister Peter Garrett has said the magazine was being needlessly provocative.
The girl's father, art critic Robert Nelson, says the family has no regrets about the photograph and he has rejected the Prime Minister's criticism of the work.
"There's never been any study that suggests that there's a link between paedophilia and art," he said.
"Unfortunately we're working without any science; people are just making these assertions about protecting children, which is unarguable - I mean why would you not want to [protect them]?
"But no-one's really explained, protect them from what."
Prime Minister Kevin Rudd says no child that age could give their consent to such work but Mr Nelson says Mr Rudd should back up his concerns with evidence.
"I think he's welcome to have an opinion on art - I think that's to be encouraged," Mr Nelson said.
"I think the problem arises when, as he did with Bill Henson, he declared that the images are revolting and linked them to the protection of children without a shred of evidence."
But Joe Tucci from the Australian Childhood Foundation says parents should not be allowed to give consent to posing naked on behalf of their children.
"They have the legal right to consent on behalf or their child, but I don't think they have the ethical right to do that," he said.
"I think you can't tell now what the impact will be on that child even today."
'Business as usual'
Fellow artists are defending the magazine's decision to use the photograph on its cover.
The magazine's editor says the image was published in an attempt to "validate nudity and childhood as subjects for art".
He said he wanted to restore some dignity to the debate following the controversy in May, when artist Bill Henson's photographs of a naked prepubescent girl in a Sydney gallery were confiscated by police.
Martyn Jolly is the co-author of an article on the controversy that is published in the same edition of Art Monthly. He is also the head of photography and media arts at the Australian National University.
"The original photograph, the Bill Henson photographs have been found to be OK ... they were passed by the Board of Review," he said.
He says putting the photo on the front cover was just "business as usual".
"It could be a provocation or it could be simply saying, 'No we aren't going to ... buckle'," he said.
"We aren't going to let this small pressure group dictate what we can and can't show. We aren't going to let the tabloid media, who are always wanting to create media panics, dictate what we can and can't show.
"And we aren't going to let politicians who are always wanting to jump on populist bandwagons dictate what we can and can't show."
Mr Jolly says the magazine had a duty to reignite the debate over children in art.
"I guess if you're the editor of a magazine which is meant to be reporting on Australia on a month-by-month basis and this has been the biggest thing in Australian art for a long time, you'd be [neglecting] your duty if you didn't actually discuss the debate," he said.
Art Monthly receives funding from the Australia Council, which has issued a statement saying the magazine has been and remains a very effective and valuable means of communication for the visual arts.
"We don't think it appropriate to judge any journal covering a wide field of interests and a diverse range of issues on one deliberately provocative statement which in itself is reaction to an already overheated controversy," the statement read.
"For many years our society has managed to differentiate between artistic creativity and the totally unacceptable sexual exploitation of children.
"Continuing to argue extreme positions is not creating any greater clarity."
The magazine is also funded by the Federal and ACT Governments, and ACT Chief Minister Jon Stanhope has defended the magazine's right to publish the photo.
Mr Stanhope says he has not seen the picture but he says the magazine is a reputable publication.
"To suggest that this particular photograph that's on the cover of this paper is in anyway pornographic or represents child pornography - I haven't seen it but that's a huge leap to suggest that a photograph of a young child is inherently pornographic if it is displayed publicly," he said.
"That's a concept that causes me enormous difficulty."
The Federal Government says the Australia Council will now be asked to draw up a set of protocols on the representation of children in art.