I just checked your code with Your Mother's recommendation and it worked just fine. I did, however, have to remove the ä symbol because XML::Smart complained about it being encoded incorrectly. After that, and changing 'FALSE' to 0, it gave me (the presumably expected):
<?xml version="1.0" encoding="UTF-8" ?>
<?meta name="GENERATOR" content="XML::Smart/1.78 Perl/5.022004 [cygwin
<msg>This is my SVN message with characters like or &.</msg>
I could easily have something munged in my various Windows/Cygwin/vim settings to have messed up the 'ä', but I'm mentioning it just in case you need to know of it.
When your only tool is a hammer, all problems look like your thumb.