Here is what we know from ABC Middle East Correspondent Eric Tlozek.
East Jerusalem is considered to be Palestinian territory under occupation according to international law. Most countries avoid conflict by placing their embassies in the commercial capital Tel Aviv because the status of Jerusalem is one of international law and diplomacy's most problematic questions.
The diplomatic and often violent conflict between Israel and Palestinians has not been settled since the war over the creation of the state of Israel in 1948. In 1967, Israel drove out Jordanian troops from the east of the city and dramatically expanded its municipal borders.
Numerous United Nations Security Council Resolutions criticise Israel's subsequent actions in East Jerusalem, including calling on Israel to
"withdraw its forces from territories occupied in the 1967 conflict" (242),
"desist forthwith from taking any further action which tends to change the status of the city" (252),
"dismantle the existing settlements" (465)
and "cease settlement activities" (2334).
UNSC resolution 478 also calls on member states to withdraw their diplomatic missions from the city. In 465, the Security Council called Israel's settlement policy and practices “a flagrant violation of the Fourth Geneva Convention …" and "a serious obstruction to achieving a comprehensive, just and lasting peace in the Middle East".
The International Court of Justice concluded "third states" such as Australia have a duty not to recognise an illegal situation as lawful or assist in maintaining it. States also have a responsibility to ensure respect for the Fourth Geneva Convention.
These are among the reasons why many nations are reluctant to change a long-held position on Jerusalem.
Tension is evident on any visit to these places. Most Palestinians in the east have Israeli residency, not full citizenship. That residency can be cancelled at the discretion of Israeli authorities.
The contrast between Palestinian neighbourhoods behind the wall — poor, crowded, chaotic — and suburbs in the west is striking.
Moving the Australian Embassy ?
The first Morrison Announcement
During the Wentworth by-election to elect a new MP after Malcolm Turnbull retired from politics, his replacement Prime Minister Scott Morrison announced the Government intended to seriously consider moving the Australian embassy in Israel to Jerusalem.
This announcement delighted some Israeli voters in Wentworth and at the same time drew strong rage from Palestinian and other Muslim voters across the country.
Morrison hastened to add he was not abandoning the ‘Two State Solution’ goal both sides of Australian politics have adopted to this issue for some years.
"We are committed to a two-state solution, but frankly it hasn't been going that well, not a lot of progress has been made”.
Palestinians want the capital of an independent Palestinian state to be in Jerusalem's eastern sector, which Israel captured in the 1967 Six-Day War and annexed in a move never recognised internationally.
Former Foreign minister Julie Bishop was opposed to the idea, despite strong support for a move from within the Liberal Party base.
During Senate estimates hearings in Canberra, Foreign Minister Senator Payne said she first learned the Prime Minister wanted to review the policy when he rang her two days before the announcement.
Department of Foreign Affairs and Trade [DFAT] staff confirmed at the same estimates hearing that DFAT was not consulted by the Prime Minister or Foreign Minister before the decision was made.
Labor Shadow Foreign Minister, Penny Wong described the Prime Minister's announcement as a “very rushed” decision taken without responsible consultation in a desperate bid to win the Wentworth by-election in order to maintain majority Government.
"[Jerusalem's] status has to be resolved as part of any peace process discussion, as part of any discussion about a two-state solution. And the fact that this has been a bipartisan position I think shows the lack of wisdom in Mr Morrison floating this."
At the 2016 Census, Jewish people made up about 12.5 per cent of the population of Wentworth.
Israeli Prime Minister Benjamin Netanyahu was quick to thank Mr Morrison for considering the move, tweeting that he had spoken with his Australian counterpart.
NSW Jewish Board of Deputies' chief executive, Vic Alhadeff, welcomed a potential move to Jerusalem. He said it may also strengthen economic ties between Australia and Israel, and would not preclude East Jerusalem from becoming a future capital of Palestine
"[Jerusalem] is where the seat of government is, it's where the Israeli parliament is, it's where the Supreme Court is; so the statement by the Prime Minister that he's going to consider moving the embassy reaffirms and recognises that Jerusalem always has been the capital of Israel, and it reaffirms the 3,000-year connection to Jerusalem and to Israel," Mr Alhadeff said.
In contrast, Bishop George Browning, President of the Australia Palestine Advocacy Network, said in a statement the idea of moving Australia's embassy to Jerusalem would have no effect on the two-state solution was "ludicrous".
"Australia is aligning itself with the most erratic, reactionary and bullish US foreign policy ever. It is an irresponsible announcement that will put Palestinian human rights further back, for a handful of votes in Wentworth. The two-state solution and the so-called peace process is not working. The reason for this is that Israel, supported by US policy, constantly undermines Palestinian hopes for autonomy by expanding settlements and entrenching the occupation. To move the embassy is to reward this behaviour and signal an end to any genuine bipartisan commitment".
Indonesian correspondent David Lipson reported that Indonesia was considering putting trade deal on hold over Scott Morrison's Israel embassy comments. Indonesia's support of a Palestinian state is one of its most important foreign priorities.
Live cattle, dairy and horticulture exporters in Australia were on the phone to National Party electoral offices voicing strong opposition to anything that would put this trade deal at risk.
Back Peddling ?
This may be one of the reasons why Liberal Prime Minister took a more nuanced approach which did not include moving the Embassy to Jerusalem (for now) by Christmas 2018.
The trade deal, 8 years in the making, would particularly benefit Australian farmers and education providers. The landmark free trade agreement was cemented during Mr Morrison's first international trip as Prime Minister. It was set to be signed before the end of the year - 2018.
Mr Morrison said in August negotiators had also secured lower tariffs on live cattle, dairy and horticulture exports. The agreement would also benefit the Australian education sector, with universities and vocational training providers being given the green light to set up shop in Indonesia. In return, Indonesia wanted greater access for Indonesians to work in Australia as well as support for its crude palm oil industry.
The Indonesian Foreign Minister responded to the October Embassy announcement immediately
“We have conveyed to Australia our opposition Re Embassy issue.... Indonesia encourages Australia and other nations to continue to support the peace process and not conduct any action that could undermine the peace process and global security”.
Mohamed Khairat, Egypt's ambassador to Australia, said representatives from 13 Arab countries met in Canberra and would be sending a letter to Senator Payne, voicing their concern about Mr Morrison's comments,
"Any decision like that might damage the peace process … this will have very negative implications on the relations between Australia and not only Arab countries but many other [Islamic countries] as well".