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Local Government Minister David Templeman said on Friday he would appoint an inquiry panel with powers similar to a royal commission.
Three commissioners have been appointed to run the council in the meantime.
Council infighting and reports of a toxic culture across the organisation, including the council, executive and 700-strong city workforce, came to a head when chief executive Martin Mileham took stress leave last week.
His replacement, Robert Mianich, then also went on stress leave this week and the council appointed Anneliese Battista in the role.
Both cited "workplace safety" issues.
Lord Mayor Lisa Scaffidi has also faced controversy over her failure to disclose gifts and travel expenses.
Mr Templeman said on Friday that ratepayers had not received good governance and he had to "draw a line in the sand".
"There is no doubt the status of the City of Perth has been tarnished and we want to turn this around as soon as possible," he told reporters.
The three commissioners to replace the council are Eric Lumsden, retiring chairperson of the WA Planning Commission; Gaye McMath, former executive director of Perth Education City; and Andrew Hammond, retiring chief executive officer of the City of Rockingham.
They will decide whether or not suspended councillors are still paid and Mr Templeman said he would meet them on Tuesday.
Mr Templeman also admitted he was aware of claims a councillor had removed a box or boxes from Council House and said the allegations were being investigated.
Opposition spokesman Tony Krsticevic welcomed the inquiry but criticised the Labor government for taking so long to act.
"I think we need to know exactly everything that's gone on in the City of Perth for the last few years," he said.
"I think all of the councillors should resign, I think the Lord Mayor should resign as well."
Ms Scaffidi said in a statement that she had mixed feelings but welcomed an independent review into "recent events", referring to the two CEOs.
"I have had enough of the finger being pointed at me as the sole cause of the problem," she said.
Ms Battista said the decision was a "much needed circuit breaker" for ratepayers and employees.
"It would be naive to suggest the issues facing the council haven't impacted the reputation of the City of Perth," she said.
It is not known how long the entire process will take.
When the City of Canning was suspended in 2012, it took almost two years for councillors to be sacked and nearly three years before an election was held.