It sounds like the plot of a movie, but an outback tax scam is set to have serious consequences for families in Western Australia's remote north.

Some people were paid out as much as $80,000 that the ATO said they were not entitled to, prompting a spending spree that has now been making it difficult for the ATO to recover the funds.

"Every time I go into a remote Aboriginal community I see and hear amazing stories," said Broome-based financial counsellor Alan Gray.

"Of people flying to Perth and going on massive holidays, $80,000 LandCruisers driving around in remote communities that weren't there before.

"On one level it's a very serious matter, but on another level it's sort of hilarious to think that our federal tax office has been handing out massive sums of money to some of the poorest and most disadvantaged people on the continent."

The scam appears to have originated in the town of Derby, when it was realised people could get a payout by inflating the amount of money withheld by an employer on their tax return.

ATO assistant commissioner, Karen Foat, said that at least one person started charging people money to show them how to commit the fraud.

"Some of these people were approached by a promoter of this scheme," she said.

"And they were charged an up-front fee in order to get this information on how to get a bigger refund.

"More than 700 people did try to claim incorrect amounts worth more than $20 million, but the ATO was able to identify this issue quite quickly so only 42 people did receive incorrect refunds."

Shopping spree:

The ATO refused to say how much was wrongly paid out, but the ABC has spoken to several people who each received more than $50,000.

Philip 'Bibido' McCarthy lives in the bush community of One Arm Point, 250 kilometres north of Broome, and said people went on an immediate shopping spree.

"People were excited, and there were apparently large amounts of money going into accounts — thousands and thousands of dollars," he said.

"Everyone was talking about how people were purchasing vehicles, you know, purchasing quite expensive vehicles and probably home goods as well."

Debts to be collected:

The ATO has now been faced with a challenging debt recovery process.

Some of the people involved live in isolated communities with limited mobile phone use, and are proving difficult to locate with their newly acquired, taxpayer-funded assets.

Mr McCarthy said many would not be able to afford the repayments.

"These people who actually got this thing, they're on low incomes, they're on Newstart or paying child support, so financially they're not on big wages anyway," he said.

"And those vehicles they bought … well they depreciate quickly as soon as they roll out of the caryard, don't they?"

Morally murky:

Complicating the situation is that there appear to be varying degrees of culpability and awareness among the 42 people involved.

Ms Foat acknowledged some of those who made false claims were victims of a scam rather than fraudsters.

"We know that many of the people who were caught up in the scheme didn't fully understand that what they were doing was incorrect," Ms Foat said.

"Our main focus now though is to work with people to put in place arrangements that help them to repay the amounts.

"We know that many people have already spent their refunds.

"That's why we've got a dedicated team in place, [to] work through case by case, understand people's circumstances, and come up with the best solution for them."

Flawed system:

Some believed the approach was unfair and unrealistic, given the poor financial literacy of many in the remote Kimberley.

Alan Gray, who is based in Broome but does outreach and counselling work throughout surrounding Aboriginal communities, said the situation should never have been allowed to occur.

"I really do believe the tax department needs to take some responsibility for this," Mr Gray said.

"Because what sort of system just hands out an $80,000 tax refund to someone who's only ever got $15,000 a year on Centrelink payments?

"There's no doubt that there's an element of people thinking 'Wow, this is awesome' and their desire to get the money overrode cool, calm thinking.

"But my view is that … [the ATO] has been negligent, and they need to step-up and take responsibility for having a MyGov system that you can drive a truck through."

He planned to write to the ATO requesting that the debts be waived, given the unusual circumstances.

"You've got people who are maybe getting $15,000 a year in Centrelink payments, and all of a sudden they owe the tax man $40,000," Mr Gray said.

"So not only will people be stressed out of their minds about that, but why would they go out and get a job if everything you earn is going to go to the tax office?

"I think some senior person from the tax office needs to take charge of this issue and organise a bulk release of debt, which is a rare instrument used by the tax office to write-off debt."

In the meantime, the main message from the ATO was for the people involved to return their phonecalls and deal with the situation.

"Some people have not responded, so we would encourage them to get in touch with us as soon as possible," Ms Foat said.

"This issue is not going to go away by itself."

Ms Foat would not be drawn on whether the 'promoters' of the fraudulent scheme would be charged, but said the ATO would work with state and federal authorities to investigate any potential criminal conduct.

Source | ABC