Damian
That is far too slack unless the nut has a cylindrical extension to take up the clearance. I have seen one such arrangement. Nicely made but no idea why it was done that way. Presumably the man who made it had a good reason but it wasn't passed on to the new owner. Most likely the top hat was a hardened, professionally made component for a lathe with a bigger stud and it was easier to tun down a long nut than make a new top hat bush.
Normally the top hat bush is made an easy sliding fit on the stud and in the tool post. Not rattling loose but an easy fit. The post is supposed to be held by friction on its base not by location against the stud.
Clive