I have heard an assertion that Maori and Pacific island troops during WW1 were not allowed firearms and that this is the origin of the term 'digger' as they were assigned to dig trenches in lieu of actual combat with white people. Is there any truth to this assertion and if so, what sources support and/or contradict it?
Before answering your question, I would like to take the time to contextualize the claim that the original assertion made. Although ethnic minorities did fight in the First World War as active combatants, with some exceptions the majority did not. Not because they did not want to, but because of various reasons, they were denied the opportunity to do so.
The inclusion of ethnic minorities as combat soldiers on the Western front during the First World War is a long and complicated process which expressed itself in various and contradictory forms from one imperial army to the other. Although Germany did not field soldiers from its African colonies on the Western front and accused France in its propaganda for unleashing the "primitive Africans" onto the white European race, there were Afro-Germans fighting for the Kaiser. Although the British Empire decided not to use soldiers from its African colonies or black soldiers from the British West Indies on the Western front, they did not hesitate to make use of Indian soldiers and also included black British soldiers in the ranks of the regular British army. France, unique out of all three main imperial powers on the Western front, did not hesitate to use West African soldiers whatsoever. These complexities make for very interesting studies in their own right. However, for the sake of your question, I will frame it in the context of the British Empire and its dominions.
For the British Empire, there were two main arguments against the inclusion of ethnic minorities in active combat roles. First, and perhaps most importantly, was the protection of the racial hierarchy which was at the very core of British imperialism. By allowing men of color, in particularly of African descent, to fight against and even kill white men would upset the status quo which in turn might have larger consequences. The second argument revolves around racial prejudice and the idea that men of color simply did not have the intellectual or emotional capability to be good soldiers and were inferior to white soldiers. The result of this thinking meant that although soldiers of African descent were allowed to serve in uniform, they were not allowed to fight on the Western front against white Germans and were instead given other roles working with different non-combat tasks.
In regards to indigenous peoples, policies varied and could also be very contradictory. Canada was hesitant at first but allowed their indigenous population to join and serve in positions where they'd see action against white men (while at the same time segregating black Canadians into the No. 2 Construction Battalion and giving them labour duties). New Zealand accepted both Maori and Pacific Islander recruits but used them for labour duties on the Western front. Australia outright rejected Aboriginal men from serving in the Australian army in any and all capacities.
There were some exceptions. For example, as already mentioned, the regular British army had black British soldiers, although it was very much up to the recruiter whether or not they were accepted into the army when they were first volunteered. Although Aboriginal men were meant to be rejected, some did serve in the Australian army by lying on their enlistment forms and making themselves out to be dark-skinned Europeans. Outside of the Western front, the use of soldiers of color were far more widespread. For pragmatic reasons and since the enemy was considered "less white" than western Europeans, soldiers from the West Indies, Maori and Pacific Islanders all fought against Ottoman soldiers in the Middle East. The largest exception of them all were Indian soldiers who served on the Western front, the Middle East and in Africa.
In summary, when, where and how soldiers of color from the British Empire were put to use was never static and always contradictory. It would be false to claim that Maori and Pacific Islanders never saw battle or weren't armed, something they most certainly were at Gallipoli, but their changing roles during the war is confusing and the fact that not all Maori and Pacific Islanders were concentrated in the New Zealand Pioneer Battalion makes it difficult to truly generalize. However, that they served in both armed and non-armed roles during the war shows the complexity of their participation in the war.
Sources:
The Idea of a British Imperial African Army by David Killingray in The Journal of African History 20:03 (July 1979), p. 421-436.
Race, Empire and First World War Writing by Santanu Das (ed.) (Cambridge University Press, 2011)
Indigenous Peoples of the British Dominions and the First World War by Timothy C. Winegard (Cambridge University Press, 2011)
Empires at War: 1911-1923 by Robert Gerwarth and Erez Manela (ed.) (Oxford University Press, 2014)
Black Tommies: British soldiers of African descent in the First World War by Ray Costello (Liverpool University Press, 2016)