A lot of posters have said that your writing level must significantly improve from Masters to PhD level. My question is what can one do to help the process along? How do you know when your writing is good enough?

I wouldn't worry about it too much. Firstly, the university you are at should run academic writing courses. Secondly, as you read and write, during the course of your PhD, you'll familiarity breeds competency. Thirdly, there are books you can read on academic writing that'll help. I think when you begin, it's a case on conscious incompetence. But as you go along, you'll just notice that your writing will improve when you compare and contrast your efforts from past and present. Please take a look here: http://www.amazon.com/Introduction-Academic-Writing-Second-Longman/dp/020169509X

I was really scared of this, but then I read through a colleagues thesis and was surprised at how simple the writing style was. I always think I write in a babyish style and always have the thesaurus open in word in an attempt to put in 'big words' but my supervisor said that my writing was better because its not all academic jargon.

I would definitely recommend reading through a thesis or two in your area.

The thing to remember is that the theses and papers you read will have been through several drafts/edits to acquire their prose. The danger a lot of people fall into is getting too caught up in using fancy words whilst they're still thinking through their arguments. It is much better to separate the thinking part from the writing part. In the first instance, get the points down in whatever prose feels comfortable and leave the academic prose until the editing stage.

help with rephrasing sentences, experts can help with technical passages. It gets really easy eventually and never underestimate the value of the thesaurus!