I was on the chat to AppleCare yesterday, i was eventually handed over to an advisor and we worked on it for hours.
Eventually we found the playlist would work normally on my phone if we unchecked the the "Live Updating" in the setting for the smart playlists.
We don't know why this worked, as i have other smart playlists and they work perfectly fine with the "Live Updating" box checked.
We ended up collecting all my phone's data and sent it away to the engineers so they can fix the issue. He will be in contact with me when the engineers get back to him. I'll try to remember to post back here the updates i get if they are relevant.
So for now, just unchecked the "Live Updating" box on the settings for your smart playlist on iTunes on your computer.
If you want to 'update' the songs in the playlist, for now I'd suggest:
1- open the settings on the playlist, re-check the "Live Updating" Box
2- click the "OK" button
3- re-open the settings on the playlist, uncheck the "Live Updating" Box
4- then sync phone.
I hope this works for all of you, but it should be fixed in the next few updates.