Power quality improvement in a three-phase four-wire system is achieved using a new topology of DSTATCOM (distribution static compensator) consisting of a star/delta transformer with a tertiary winding and a three-leg VSC (voltage source converter). This new topology of DSTATCOM is proposed for power factor correction or voltage regulation along with harmonic elimination, load balancing and neutral current compensation. A tertiary winding is introduced in each phase for a delta connected secondary in addition to the star-star windings and this delta connected winding is responsible for neutral current compensation. The dynamic performance of the proposed DSTATCOM system is demonstrated using MATLAB with its Simulink and Power System Blockset (PSB) toolboxes under varying loads. The capacitor supported DC bus of the DSTATCOM is regulated to the reference voltage under varying loads.