NeoThermic:
I've attached a rubbish schematic that i threw together in paint.Until i added the wire in green, the voltage reading on the arduino pin fluctuated wildly around and made no sense.
Well you are missing the key element of how the arduino was being wired for power and ground before you added the green wire. You stated it was coming via a USB connection via the external 5vdc regulator. Can you add that detail?
The ground path from the battery via black wire to regulator to pi to arduino via usb cable should have established a working ground reference, otherwise the arduino would have been able to run at all before you ran the extra ground? So I'm still confused, but it's probably not your fault. 
Lefty