Been trying to get this working too.
I *THINK* as Michael Smith suggested the problem isn't with permissions to the ibay, but where the temp files are being written prior to being moved to the subdirectory in the ibay.
If you use the server-manager log viewer for messages take a look at the errors.
I'm guessing this has to do with the way SME is setup to secure php. Basically as it stands, this is limited to a particular path (or paths). I'm not sure exactly what to change this to & where to do this.
Try a few searches on the topic "open_base" on these forums. I'm pretty sure this is the issue. Aside from changing the allowed path to "/" I'm not sure how to solve this problem.