You are correct. Nearly ALL of the fuel is burned.
The 35% (or whatever % you want to use) is due to two factors.
1. Even in principle, it is impossible to get a higher efficiency than (Tupper - Tlower)/Tupper where the Ts are ABSOLUTE temperatures. Tupper is the maximum temperature occurring during combustion, Tlower is the ambient temperature. Tlower can not be controlled, so it is most efficent to make Tupper as high as possible. Limitations of materials, NOx emissions, etc, limit this temperature.
2. In the real world, a piston engine has frictional losses, etc. These losses cut efficiency greatly.