I'm not sure it was ever an "issue" to begin with... It would be absolutely awesome if you could free distort a smart object, but I understand why you can't. Smart Objects are essentially collections of a variety of files clumped together, so it makes perfect sense that you can't distort the entire collection at once. Still, you would think Adobe could figure some way around this.
Im just trying to figure a neat way to place a label (created in illu) on an image of a bottle and then having the flexibility to make changes to the label so that it would update the image of the bottle.
Try this hack/workaround—this has been my way of doing what you want to do for years:
Draw a rectangle using the SHAPE Tool (this is going to be where you place the label) on top of the bottle image.
Convert the layer with the rectangle shape to a Smart Object.
Double click the Smart Object, this will open the rectangle as a separate document.
Place your Illustrator label file into this Smart Object document. Save the file, which will close it and go back to the original PSD file.
Now you can distort that Smart Object Shape.
Once you do this once, you'll see how it works, and you'll tweak it accordingly.
The reason this works is that the original Smart Object is a simple rectangle shape, not a placed document. It's the content of the Smart Object Shape that contains your label art, but Photoshop doesn't see or care about that.