“Australia now recognises West Jerusalem, being the seat of the Knesset and many of the institutions of government, is the capital of Israel'' - Scott Morrison, Australian Prime Minister
Australia recognised West Jerusalem as Israel’s capital today, to the irritation of Israeli leaders, who were unsure initially how to respond. The point of contention is both Australia's nomenclature and its ongoing hesitation to move it's embassy to Jerusalem itself. Israel considers and maintains that all of Jerusalem, and not simply the western sectors, belong to Israel and collectively make up the Capital city, citing that Israel's ownership of the city is eternal.
This of course leaves no room for Palestinian aspirations for both statehood and establishing East Jerusalem as its own capital. Australia, along with most other western governments, also supports Palestinian statehood ambitions, though remain staunch allies of Israel. Hence there was uncertainty on how to respond to the Australian announcement, which continued with further unhelpful comments for Israel:
“All of Jerusalem remains a final status issue for negotiations, while East Jerusalem, under international law, is an integral part of the occupied Palestinian territory,”
The statement can be interpreted as both endorsing and qualifying Israel's line on Jerusalem, it's not clear what's Australia's thinking was in making the announcement at all, which seemingly irritated Israeli PM Netanyahu.
The PM declined to comment beyond the government's initial, terse response, that the announcement was 'A step in the right direction'.