Legally all your island really is is a bit of land surrounded by shoreline and that shoreline is the interesting bit. It may automatically be public access or not depending on where you are, you may be accidentally part of some incorporated town and there may be specific rules governing islands.
I would advice against issuing your own passports but if you happen to have an anti-aircraft gun and an old torpedo lying around you could even consider going sovereign.
And once you successfully pull that off you can do whatever you want with your island ;)
The ministry will do periodic inspections of land, and will investigate complaints. The property we purchased had all vegetation removed from the shoreline to expose the natural sand beach. The owner was fined, and forced to lay down landscaping fabric and crushed granite to cover it in order to reduce erosion. The matter was strictly dealt with by Department of Fisheries.
As for septic, you're required to build a field, but permits are easily obtainable. Same goes with putting buildings; permits are (usually) required, but usually attainable relatively easily.
Then again, there are some pretty janky home-made docks in the bay that seem to have been there for a while.