By squatting low, you involve your hamstrings and glutes to a greater degree, than when squating in a shallow manner - it is much better to do this, as more muscle is stimulated. However, those who are not particularly flexible find this difficult. Powerlifting dictates that a squat to parralel is an acceptable lift, however, purely from a training perspective, squatting lower than this has added benefits (powerlifters go below parallel in training).
Just don't let the kneees extend over the toes (something which is unavoidable if you try to do traditional squats (not feet placed, far out) on a smith machine. Also Smith machine places extreme shear forces on your joints, and you have to place the bar on a different part of your back - avoid.