I cannot find anything in the QF FF program information that restricts upgrades from any paid fare.
From
Qantas web site
<font face="Verdana, Arial, Helvetica, sans-serif" size="2">You will need to have a confirmed (and paid) Qantas domestic or international ticket on a Qantas-operated service with a Qantas (QF) flight number to upgrade using Qantas Frequent Flyer points or Upgrade credits. Upgrades may be pre-booked between 355 days and 24 hours before departure, if an Award seat is available.
To request a flight upgrade, call flight Award reservations.
Upgrades are subject to capacity controls and availability is limited. Upgrades will only be provided if there is a seat available in the relevant Award booking class. This depends on the flight, date, season and destination. Some flights may have no Award seats available.</font>
Also note that some things change next year (01/01/2004) as per the * reference from the table of points/UC's rewquired:
<font face="Verdana, Arial, Helvetica, sans-serif" size="2">* Effective for bookings from 1 January 2004: For domestic flights within Australia, Discount Economy includes Super Saver (classes M, L and V) and Red e-Deal (class N). International flights including flights within New Zealand (classes B, G, K, L, M, N, O, Q, S, V, W)
For domestic flights within Australia, Full Economy includes Fully Flexible (classes Y, B, H) and Flexi Saver (class K). International flights including flights within New Zealand (class Y)</font>
This clearly includes N fares in the list of discount international fares that can be upgraded.
You must have a confirmed and paid ticket, so that excludes FF award tickets (X or U class) and free tickets that might have been provided as a prize or other industry incentive by Qantas (since you will not have paid for the ticket). Note that paying for taxes as per award tix is not the same as having a paid ticket.
I would be asking the agent to show you where in the N fare rules or the QFF programe rules it states the fare is not upgradable. Perhaps we have all missed something and QF can point us to it.