Congratulations on your new home. I think you have been very sensible to live in it for a year before starting your decorating, it has given you time to consider the lighting and aspect of each room in all seasons as well as time to evaluate how you want to live in your home and exactly what you need. The lounge does look very big and bulky and will definitely dominate the room, so I would keep to the lighter colour. Don't worry about the kids and dirt - as Kookykaren said, leather cleans easily - sharp objects and textas are your bigger worry regardless of what colour you choose. Laying newspaper on the floor to the size of the lounge is another way of checking how it will look as it gives you a better indication of bulk than tape. I would keep your ottoman simple (one with storage is an excellent idea with the children), just a tone on tone fabric or a pattern using the colours in the rug on the floor of the photo of the lounge. I don't think you have room for too large an ottoman but I would have a square one made the same height as the lounge so when just you and DH are watching TV you can push it against the other end of the lounge and both have a chaise. You can then bring some colour with art work or some patterned cushions on the lounges.

I had a 2nd hand lovely resort style lounge (cane with fabric) which quickly became pulled and tatty after my 2 small dogs had been using it. The leather lounge & two large leather recliners I have show no damage (regardless of long or clipped nails) and both pets love these. Having a blanket the dogs know is theirs is a great idea especially with leather, as the initial cold feeling of leather means both dogs only want to be on the blanket.

I have used Saatchi Art (saatchiart.com) to both browse and purchase art for our home. Original art work can be purchased and most artists have prints at a more affordable price. It's a good place to determine what styles and mediums you love as you can filter your search. For Australian art I love Blue Thumb (bluethumb.com.au). All Aussie and all original. Very few options for cost effective prints unfortunately. I'd be cautious about filling the space for an instant look. As everyone before me has said "art is personal" and as such, I think it should grow with you and your space. Start with one piece that you really love, big or small and work around that. I have found that putting unusual unexpected items on the wall makes for interesting 'art'. My husband's baby shoes (circa 1953) and now our children's first shoes are objects that always create conversation when guests come over. I have a Mexican art cross (we're not religious, the colours and the metal work drew me to it), a vintage wooden Indian spindle, African birds in a tree hand-beaten and cut from a steel drum, a clay mask my daughter made in art class, a woven Maori kit bag, some art that our kids have done at school (put into Ikea frames so they are always the right size. We change them as something else we love comes home), a hand-made ceramic tile, a growing collection of geckos found in antique stores, vintage travel posters in frames, (I'll stop listing what we have!)...all these items and more, have been collected over the last 20 years and put up around our collection of art or in clusters to create stories. I've collected the initials of our family (yes the child with the "K" is not thrilled it's so small and the child with the "G" feels he's by far the favourite! Needless to say both will be replaced in the future when a more appropriate size comes to light) from vintage stores both here and overseas. Our walls are a growing collection of art and objects and at any time I can move things around and change the composition as a new item is discovered. Best advice I can give you is to have fun with it, enjoy creating your own gallery, it's for you to love you're not required to impress anyone else.

Do you have a picture of the room? If you get a tan leather to go back with the grey, I would want to see cushions, throws, a rug and artwork that have lots of grey and tan to link the colour palette together. If you go for fabric, then your choices for decorating the space can potentially be broadened to your imagination... depending on what else is already in the space (that's why a photo will help).