I totally agree with you, but the thing is when they use the flat side of the nut and a lock nut, the axle hub has to sit on the center of the wheel perfectly, not 1/8" distance, as it can't center. They show a perfect fit on the picture, but in reality it doesn't sit. Have you had a chance to remove a nut on yours yet?
There are shoulders stamped into the wheel around each nut/washer area, along with the raised lip of the center hole. If you look at my picture:
you can see that the washers are up against the raised lip of the center hole, and they nestle within the stamped shoulders. So that's how the wheel gets centered. When all the nuts/washers are snug down in their little spaces, the wheel would have to be evenly centered (within the tolerances of the wheel and lugs).
I think the problem in your case is that you did not have any washers, so there was no way for all the lugs to center the same way. In fact, if you refer back to your original picture:
you will see that the nuts are not evenly aligned. The flats of some nuts were facing the hub lip, while the points of other nuts were rubbing against the lip. Given the size of these nuts, that's easily going to push the wheel out of whack by 1/16-1/8" in any direction, which is evident in your picture -- the wheel is skewed away from the nuts with points touching the hub, and skewed towards nuts with the flats facing the hub. On top of that, the nuts were probably rubbing on the hub lip as they were torqued down. All of this would have caused the wheel to wander and walk around as it was tightened down.
I think the best solution would have been to add some washers -- even flat (non-lock) would do, as long as they were the right size. That would have gotten the nuts up away from the lip, helped evenly space everything about the rim/hub center, and then you'd keep the benefit of stronger mounting holes (ie, without machining tapers in).
I don't think Kubota has a great system here, but as designed and described in the manual, it should work as long as there are washers to center on the corresponding "sockets" stamped into the wheel. The best system would be one that is hub-centric (like most cars) where the wheel centers on the hub directly, and the lugs/nuts are only there to hold them together. Lug-centric wheels have been used on some cars, and are always a little wacky.