No that's not true. At least not for all of the gift cards that Coles sells.
You are factually incorrect.
Per
"Gift card terms of use"
"These Terms of Use apply to all Gift Cards issued by Coles Group Limited."
"Gift cards cannot be used to purchase gift cards."
But if you aren't prepared to play the game then gift card inception may not be for you.
I don't know what your problem is, the fact is, you cannot use a gift card to buy gift cards. End of story. That's the T&C.
If the staffs who has to approve your transaction at the cash register doesn't care, then sure, pay with your 5% discounted Coles gift card (I have done this myself); but don't expect this to be a right, and don't have a go at the staff if they enforce the rule.
But if you aren't prepared to play the game then gift card inception may not be for you.
If you're worried my advice would be to use the self checkout area when they are busy and if they are nosy tell them you value your privacy and are offended by them watching you make payment.
That is simply unacceptable behavour.
Point 1: They can be nosy while you pay. Having the goods on shelf is not a contract. It is an invite to treat. They can refuse your payment, and they choose not to sell to you, they can ask you to leave. That's the legal side.
Point 2: Is this how you treat people? Even if they are working in retail and earn $14 to $24 per hour? That's simply poor form.
If you have to resort to breaking T&C and abusing retail workers, or anyone here on this forum, then you have a bigger problem than chasing points.